Supply shocks scar economy, deepen inflation, require unconventional policy mix.
Supply disruptions like energy price shocks or pandemics can lead to long-lasting negative effects on an economy. These disruptions can cause permanent output losses and reduce overall demand, potentially leading to inflation. Trying to combat inflation with tight monetary policies may actually worsen the situation and increase inflation in the long run. To successfully reduce inflation, a mix of monetary tightening and fiscal support for business investment is needed.