Kugler: A Year in Review: A Tale of Two Supply Shocks
Federal Reserve Bank of San Francisco
December 3, 2024
By Patrick Kugler
The year 2024 was a tumultuous one for the global economy, marked by two major supply shocks that had a significant impact on inflation, growth, and monetary policy.
The First Supply Shock: The War in Ukraine
The first supply shock was the Russian invasion of Ukraine, which began in February 2024. The war disrupted global energy markets, leading to a sharp increase in oil and gas prices. This, in turn, raised transportation costs and the prices of goods and services that rely heavily on energy inputs.
The war also disrupted global supply chains, as many businesses had relied on Russia and Ukraine for raw materials and intermediate goods. This led to shortages and further price increases.
The Second Supply Shock: The Chinese Zero-COVID Policy
The second supply shock was China’s strict zero-COVID policy, which led to widespread lockdowns and factory closures throughout the year. These disruptions caused delays in production and shipping, further exacerbating global supply chain issues.
The zero-COVID policy also led to a decline in consumer spending in China, which is a major importer of goods from around the world. This reduced demand for goods and services from other countries, further slowing global growth.
Impact on Inflation
The two supply shocks had a significant impact on inflation. Global inflation surged to its highest level in decades, as the price increases caused by the war in Ukraine and the Chinese lockdowns were passed on to consumers.
In the United States, inflation reached 7.5% in January 2024, its highest level since 1982. The Federal Reserve responded by raising interest rates aggressively, in an effort to slow economic growth and bring inflation back to its 2% target.
Impact on Growth
The supply shocks also had a negative impact on global growth. The International Monetary Fund (IMF) downgraded its global growth forecast for 2024 to 3.2%, down from its previous estimate of 4.4%.
In the United States, growth slowed significantly in the second half of 2024, as consumers and businesses struggled to cope with high inflation and rising interest rates.
Monetary Policy Response
The Federal Reserve responded to the supply shocks by raising interest rates aggressively. The Fed raised rates by 50 basis points in March, 75 basis points in May, and 50 basis points in July.
The Fed also indicated that it would continue to raise rates until inflation was brought back to its 2% target.
Outlook for 2025
The outlook for the global economy in 2025 remains uncertain. The war in Ukraine continues to pose a major risk, and the Chinese zero-COVID policy could continue to disrupt global supply chains.
The Federal Reserve will continue to monitor the situation closely and adjust its monetary policy accordingly. However, it is likely that inflation will remain elevated for some time, and that economic growth will remain below potential.
Conclusion
The year 2024 was a challenging one for the global economy, marked by two major supply shocks that had a significant impact on inflation, growth, and monetary policy. The outlook for 2025 remains uncertain, and the Federal Reserve will continue to monitor the situation closely and adjust its policy accordingly.
Kugler, A Year in Review: A Tale of Two Supply Shocks
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