Supply shock

Supply shock refers to the sudden disruption of economic activity caused by an unexpected interruption of important products’ supply or a sharp increase in price. In the modern era, supply shocks are often associated with energy, such as the oil embargo imposed by OPEC in the 1970s, Russia’s restrictions on gas supplies after its invasion of Ukraine in 2022, or the covid-19 pandemic, which caused many businesses to close. Supply shocks usually result in both higher inflation and lower output, and are thus difficult for policymakers to handle.