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DNB’s analysis suggests geopolitical shocks can raise inflation even as industrial production weakens, leaving central banks with a more uncertain outlook.
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De Nederlandsche Bank (DNB) published an analysis on 29 September finding that major geopolitical shocks tend to push inflation up while weakening industrial production. Its estimates suggest inflation rises by 0.3 percentage points over 20 months after a shock, while industrial production falls by 0.6 percentage points after three months. The events examined include the September 11 attacks and the wars in Iraq and Ukraine. [1]
The bank says disruptions to energy supplies, trade and supply chains can make goods scarcer and more expensive. At the same time, uncertainty can weaken confidence and demand, pulling in the opposite direction. DNB interprets its results as suggesting that the effect of disrupted supply generally outweighs the effect of weaker demand. [1]
The range of possible inflation outcomes also widens in its analysis. Twelve months after a shock, DNB estimates a rise of 0.6 percentage points in its very-high-inflation scenario, compared with about 0.3 percentage points in its very-low-inflation scenario. These are scenarios for the period after a shock, not changes in today’s inflation rate. [1]
DNB argues that central banks should not automatically look past supply-driven price rises if tensions and inflation persist: expectations of further increases could feed into wages and prices. It says there is no single standard response, because conflicts differ and their duration is often uncertain. [1]
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