Geopolitical shocks lift inflation by 0.3 percentage points
Supply shortages dominate demand slowdowns following major geopolitical conflicts, lifting inflation by 0.3 percentage points over 20 months. De Nederlandsche Bank findings show heightened uncertainty further amplifies upside price risks.
Scarcity prevails over weaker demand
De Nederlandsche Bank (DNB) examined historical economic shocks, including the September 11 attacks, the Iraq war, and the war in Ukraine, to evaluate whether supply or demand channels dominate.
The analysis shows that supply disruptions carry greater weight than cooling demand.
Following such geopolitical events, inflation increased by 0.3 percentage points across a 20-month horizon, while industrial output dropped by 0.6 percentage points after three months.
Although heightened uncertainty depresses investment, credit extension, and cross-border trade, rising costs from energy disruptions and severed trade flows ultimately drive consumer prices upward.
Why waiting risks spiraling prices
Scenario modelling indicates that in a severe outcome, inflation rises by 0.6 percentage points after 12 months, compared to 0.3 percentage points even in a low-inflation scenario.
This widening distribution increases forecasting uncertainty.
DNB cautions central banks against routinely looking through geopolitical supply shocks.
If firms and workers expect sustained price increases, wage demands and subsequent price adjustments risk turning temporary shocks into entrenched inflation.
Looking through is no longer a safe bet
Central banks can no longer afford to treat geopolitical supply disruptions as harmless, transient friction.
Demonstrating that supply pressures routinely overpower demand contractions exposes the genuine risk of policy inertia.
Rate-setters must discard benign baseline forecasts and aggressively price in persistent tail risks.