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What is Supply-Shock Inflation?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 December 2016
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Commonly known as cost-push inflation, the basic concept of supply-shock inflation has to do with a considerable increase in the cost of goods and services that are considered to be essential and somewhat difficult to substitute. This is different from the concept of demand-pull inflation, where consumer demand would drive the rate of inflation. Often, supply-shock inflation involves a trickle down effect that will cause changes in many sectors of the marketplace. One of the best examples of this situation is the oil crisis in the early 1970’s, which led to the rise of gas prices in North America and other sections of the world.

Generally, supply-shock inflation triggers not only the increase in the price of the core product, but also other products that are closely associated. As in the case of the rise in the price of oil, the auto industry was effected by the inflation within the oil industry. This meant that the prices for automobiles began to increase. In addition, the cost for auto parts began to creep up, which in turn made it necessary for mechanics to charge more for their services in order to cover the increased cost of securing material to repair vehicles.

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Not all economists subscribe to the idea that supply-shock inflation will automatically lead to higher prices for goods in a number of markets. While acknowledging the real impact of a rise in the price of an essential product on directly related products, some financial experts believe that the phenomenon that is identified as supply-shock inflation will be offset by changes in the purchase habits of some consumers.

As an example, rising costs in gasoline has led some consumers to use public transportation or utilize bicycles instead of automobiles for short errands or as a means of getting to and from work. This type of behavior modification helps to contain the level of inflation that occurs, rather than allowing the trend to continue unhampered.

Proponents of supply-shock inflation tend to be identified as supporters of the Keynesian school of economics. In relation to this type of inflation, Keynesians understand a modern economy as including prices that are classified as sticky downward or downward inflexible. In order to prevent or at least control a tendency to a recession, supply-shock inflation may function as one way of limiting the rate of unemployment and keeping the gross domestic product from falling. From this perspective, this phenomenon may be a tool to reverse adverse economic trends, and restore at least some sense of balance to the economy of a country.

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anon22843
Post 3

What are the possible effects of increased inflation on an industry?

mdt
Post 2

This is a difficult one to answer, given the richness and diversity of culture and government structures throughout Europe. Taking an extremely broad view, anything that governments can do to offset the additional cost incurred by consumers for these goods would be helpful - unless those measures also create problems in other industries and lead to work shortages. For example, tax breaks might be great, if they are not so severe that they lead to layoffs of government workers who need that steady income to make ends meet, or impact the ability of municipalities to continue providing public services.

Consumers, to the best of their ability, may want to adapt to the situation, using alternatives when possible. Bicycling for errands close to home is one way to stretch the budget for auto fuels. Considering less expensive alternatives to wheat as a source of bread may also help stretch the food budget.

anon10247
Post 1

In case with Eastern-Europen countries that experience inflation because of increase in oil and wheat prices what kind of monetary and fiscal policies should the Central Bank and the Government do on your opinion?

appreciate your answer!

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