What is a supply shock?

A supply shock is best understood as an unplanned event that affects the supply of a commodity, causing a sudden change in the availability or cost of that product. Such shocks can occur due to various reasons, such as natural disasters, geopolitical events, or sudden changes in market dynamics.

When supply is disrupted unexpectedly, it can lead to significant consequences for the market, such as increased prices for the affected commodity and potential ripple effects throughout the economy. For example, if a hurricane damages oil refineries, the supply of oil may decrease suddenly, leading to higher prices for gas.

In contrast, an unexpected change in fiscal policy does not directly concern physical supply changes, and a planned increase in production capacity usually signals a future change rather than an immediate shock. Therefore, the definition that captures the essence of a supply shock is one that emphasizes its spontaneous and unintended nature, which aligns with the idea of being an unplanned event affecting commodity supply.