Adverse Supply Side Shock  

An adverse supply side shock is an event that causes an unexpected increase in costs or disruption to production. This will cause the aggregate supply curve to shift to the left, leading to higher inflation and lower output.

Diagram showing supply side shock

supply

 

Causes of Adverse Supply Side Shocks

  1. Rising Oil Prices e.g. cartel activity by OPEC
  2. Bad weather – Hurrican Katrina disrupted supply in US last year
  3. Declining productivity e.g. general strikes

Cost Push Inflation

A consequence of a supply side shock is cost-push inflation. This causes higher inflation due to AS shifting to left. More on cost-push inflation