Years starting 2020 have been of great supply shocks. In this article I summarize the shocks of last 7 years, their cause and effect and try to synthesize a narrative to these shocks.
Let’s review the Supply shocks
Covid Pandemic 2020 to early 2022
The supply shocks began with emergence of Covid pandemic in Feb 2020 which disrupted global supply chains (my articles on pandemic induced inflation - 1, 2, 3). Briefly speaking, the Pandemic supply shocks were due to global lockdowns and planned shutdown of economy. These lockdowns came in various phases as world faced multiple waves of virus - originally in early 2020, then in mid 2021 (Delta wave), then in late 2021 (Omicron wave), then in 2022 (China’s zero Covid policy in response to Omicron).
The impact of these supply chains disruptions was peculiar & unique. During the Covid supply chain disruptions, the Oil prices crashed while prices of medical supplies (like masks, sanitizers, ventilators etc) skyrocketed. Then supply chain disruptions impacted food prices, groceries, consumer durable goods etc. Empty shelves in supermarkets especially during early period of pandemic was a common sight - a lot of consumer goods that came from China stopped coming.
Stranded shipping containers at US port during pandemic
Even if goods were being manufactured, problem was their transportation & commerce. The discombobulation of labour markets in US meant that there were no truckers and port workers to unload and transport the stranded goods at ports to warehouses and their retail destination. However, as Covid subsided, the economy & labour markets also got back to normal pretty fast. While some economists like Larry Summers (a client of Jeffery Epstein and now disgraced) predicted a decade of wage-price spirals similar to 1970s. That never materialized as team transitory did won.
Covid supply shock was the only shock which we could leave behind in rear view mirror but we didn’t know that world will face more political and economic shocks that will reverberate for a long time.
Ukraine War - First phase 2022 - 2024
In 2022 just as world was recovering from pandemic disruption (as vaccines were developed & mass produced) and experts started to put pandemic downturn behind, a new economic shock came from Russia’s invasion of Ukraine - a mindless misadventure by Russian dictator. Ukraine war supply shocks were peculiar. They raised the price of Gas in Europe as supply of Oil & Gas from Russia was disrupted, not to mention the blowing of Nordstream pipeline. The price of Oil spiked high but soon after, it crashed disastrously. This was due to western sanctions against Russian economy & energy sector in particular. There was also food price spikes as Ukraine sea route which was a major food transit (especially wheat & cooking oil etc) corridor from where large part of Africa received its food supplies got disrupted due to attacks. So the early shock of Ukrainian war impacted nations who were most poor & dependent.
The Russian Oil trade continued from 2022-2024 as Russia sold its oil dirt cheap to third world nations to finance its wars. The sanctions against Russia were not watertight and West was implicitly aware of the situation. It let it slide. Russia sold oil cheap to nations like India which greatly benefited but only temporarily. India even refined Russian oil & sold it back to Europe. All this was well known & allowed to happen because Europe couldn’t afford to completely divest from Russian energy. But this would change in 2025 as I explain below.
The first round of supply shocks of Ukraine conflict were limited because Russia & Ukraine did not go to total war immediately as both believed that some sort of negotiations will soon begin after Russia initially failed to take Kiev. There were also some short-lived compromises for Sea trade like one mediated by Turkey, and Russia was also allowed to trade its oil through back channels though at very low prices amid sanctions. Starting in 2025 Ukraine declared total war on Russia and both nations started targeting each other without any regard to trade & commerce.
Trade Wars declared by Trump regime - 2025 to present
In 2025, Trump entered White House and declared trade war against the world. I have written much about it and won’t repeat everything for sake of brevity. In brief, the Trade war was a madness, an outrageously foolish policy that needlessly disrupted global economy. First the tariffs were introduced on April 2 - the ‘Liberation Day’. But these were not one time thing. The tariffs changed by every week & every day through arbitrary declarations and Truth Social posts at midnight. There’s no point in getting into reasoning basis of these tariffs because there is no basis.
See-saw tariffs of Trump regime which changed every week or even every day
Nobody knew what tariff rates applied on which country at any given time - even the Trump regime didn’t knew. And various exemptions were doled out to various sectors of economy & the market players, most notoriously the exemptions for Computer products & components which supported AI investments . The biggest disruption, at least theoretically, was in NAFTA (USMCA) - US, Canada, Mexico - economic partnership, especially the auto sector which exists as an integrated entity. The production is globalized in today’s world and various parts of final product cross national borders several times before final assembly. Trump regime never heeded to these complexities of today’s globalized economy.
As bad as tariffs were, the actual impact of tariffs was surprisingly muted. Some experts predicted Armageddon - the supply chains will come to a halt, the international shipping will stop, the store shelves will go empty, the inflation will surge, the investment will collapse due to great uncertainty - which interestingly did not happen. American economist’s back of the envelope calculation showed that inflationary impact of trade war turned out to be only 0.8% ! Tariffs undoubtedly harmed US as well as global economy and we would never know what US economic growth would have been without them (a counterfactual) but the worst case scenarios of tariffs breaking the US economy did not materialize, at least not yet.
The legality of tariffs was contested in US courts and they were declared illegal. A reprise but Trump regime immediately started implementing new round of tariffs on flimsy grounds. As I am writing this article, Trump is threatening 50% tariffs on Canada again and threatening new tariffs on Spain. And for what reasons? - There’s no reason.
The AI Boom - Computer parts Skyrocket starting 2024
The inflationary impact of first Covid wave was in consumer goods, groceries, medical supplies etc. The inflationary impact of Ukraine war was on gas supplies (more prominently in EU) & food (in Africa). But another supply shock emerged which was different from other shocks. This was emergence of AI boom - whether it’s a bubble or not, the jury is still out. There wasn’t really a strangulation of production due to closure of factories or disruption of supply chains due to war - the supply shock in Computer components was due to diversion of supplies to specific area called Data centers. The massive investments in Data centers started gobbling up a large chunk of global Computer components production - mostly DRAM & Memory chips - which smothered the needs of average consumers. The memory chips & RAM - the crucial parts of personal computers - doubled, tripled, Quintupled & jumped even more over a period of two years. And it’s still going up.
RAM price inflation is extraordinary since 2025
As I mentioned, while the impact of wildly erratic tariffs turned out to be rather muted, the impact of AI boom caused widespread inflationary impact. The electronics in general which is equipped with memory chips & specific semiconductors became expensive - laptops, desktops, gaming consoles, automobile electronics, Smartphones, tablets etc - and the prices are going up & up (1, 2). We still haven’t reached a peak or a plateau so far.
For many years, price trends of computer hardware was sternly downwards. The computer chips always get faster & always get cheaper, the ratio of cost to computing power always went down. But that trend started to change due to AI boom and even before that in 2010s, although to a limited extent, due to Crypto mining. Large amounts of GPU power is used in this completely parasitical and anti-social business which diverted Graphics card away from consumer market.
In conclusion, the Computer spare parts and all electronics that is tied to it has become costlier and will remain so as long as AI boom is flourishing. While various economists claim it to be a bubble, it hasn’t burst yet or showing any signs of deflation at the moment.
Ukraine war’s Supply shocks make a comeback in 2025 & 2026 - War comes home to Russia
Ukraine war which by 2026 is in fourth year took another turn. Trump regime strangulated Ukraine’s military aid starting in 2025 and Ukraine was losing manpower on battleground. Ukraine had to improvise furiously to deal with military situation. By 2025, Ukraine had developed Drone technology in terms of quality & scale which tilted the balance of war. Ukraine built Drones on enormous scale and changed its military strategy which so far had been defensive up until 2025.
Ukraine declared total war on Russia with intense attacks on Russian military infrastructure, Oil refineries, shadow fleet ships, defense industry & civilian infrastructure targets INSIDE Russia. The penetration of Ukrainian attack deep inside Russian territory changed the calculus of war. Russia’s air defenses are useless against Drones. Drones are manufactured cheaply & attack in waves of hundreds & thousands, rendering missile defense ineffective. Even if 5-10% of Drones reach their targets, they can cause massive damage.
Targeting of civilian infrastructure by Ukraine - Wildberries (Russian eCommerce equivalent of Amazon) warehouse - blown up by Ukrainian Drone attack.
Russia from 2022 till early 2025 was able to finance its war - although with shrinking revenues amid low oil prices - through oil trade. Starting in 2025, Ukraine put a squeeze on this. Russian refineries were blown up, shadow fleet tankers were destroyed & sunk in Sea of Azov & black sea. The result was catastrophic for Russia and also for some other countries like Cuba who’re dependent on Russian oil.
People waiting in long queue for Gas fill up in Russia
As the tide of war is turning in Ukraine, Trump regime is also accepting the new realities. The loopholes of sanctions regime are closed which existed 2022 - 2024 and Russia is finding difficult to market its oil. US is placing secondary sanctions on nations which buy Russian oil and even otherwise, there’s much less Russian oil on the markets with Ukraine destroying as much as half of Russian oil refining capacity. The attacks on Russian energy infrastructure are so massive that Russia - a giant gas station, for the first time, is facing gas shortage. Miles long queues of vehicles in Russian cities for filling their tanks is indeed a shocking sight.
Ukrainian commercial ship with Corn supply hit by Russian missiles
As Ukraine started intensive attacks inside Russian territory, Russia as usual intensified attacks on Ukraine’s civilian targets. The Sea of Azov and Ukrainian coastline is also coming under Russian Missile & Drone attacks. But more importantly, the attacks are not limited to military targets as food & oil ships are now fair game in this brutal conflict.
The Iran war & Strait of Hormuz in 2026
In February, US and Israel declared war on Iran. The primary driver of war was Israel which assassinated Iranian Supreme leader at the onset of conflict. I have already discussed Iran war in previous article and explained how no deal is possible to resolve the crisis (refer 1, 2). As US & Israel assassinated Iranian leadership, Iran started to retaliate through two main ways. Firstly, Iran started attacking US military bases in middle east (Kuwait, Bahrain, UAE, Jordan etc) and secondly Iran closed Strait of Hormuz. Iran claims that it has right to weaponize trading routes as a strategy to defend its sovereign interests while US & NATO project freedom of navigation and condemn the obstruction of international shipping lanes. While there’s little point in arguing about legality of claims & counter claims, it’s undeniable that all parties, especially US & Israel, have a long track record of making mockery of international law.
Nearly 20% of Oil & LNG pass through Strait of Hormuz but some nations are disproportionately more dependent on oil supply from Strait of Hormuz. My home country India is facing immense pressure due to reduction in Oil & Gas from the Strait (40% of India’s crude & 60% of its LNG come from here). Although there are other nations like Japan who’re also impacted by Strait of Hormuz closure but the impact of this crisis is much more severe for poor backward economy like India.
As Iran blockades Strait of Hormuz, America started bombing Iranian civilians infrastructure like water treatment plants and bridges, thus intensifying the conflict. A new Supply Shock is probably in the pipeline as Iran may mobilize Houthi rebels in Yemen to block Bab al-Mandeb Strait.
The impact of Supply Shocks - First world vs third world and Rich vs Poor
The supply shocks and inflationary pressures they create have vastly varying impact on different nations and different social groups. Take example of Strait of Hormuz crisis. While the impact of this crisis is felt worldwide, it’s much more severe for third world nation like India. This is for two reasons. First is that India is a poor backward country, heavily dependent on non-renewable energy. Second, the inflationary impact of energy supply shock deeply penetrate Indian economy and hurt hundreds of millions of people who’re at bottom rung of poverty level.
For affluent nation like America, Oil supply shock means paying a little more at Gas pump which people can afford while making some grumblings. For people in nation like India, oil supply shock means people finding cooking gas unaffordable, inflation creeping into every essential commodity because of intensive non-renewable energy dependence. Food costs, rents, commodities, transportation etc - everything is impacted by oil price rise.
People wait in long queue for refilling LPG cylinders which is primary cooking fuel in India
Similarly, the affluent nations like America face a small uptick in inflation rate due to supply shocks but their superstores always remain loaded with food stock and essential goods. But when international shipping lanes in Black Sea or Ukrainian territorial waters shut down due to war, the people in Africa can’t get basic food like wheat & cooking oil - they starve.
Even the pandemic supply shocks had highly uneven impact on first world and third world nations. The first world nations - America & EU - cornered the medical supplies and vaccines while the third world nations scrambled to get whatever meager essential medical supplies they could buy on global markets. This disparity of impact of supply shocks between poor and affluent nations is almost universal.
Monetary policy can’t cure Supply shocks - Central Bankers are helpless
In Western world, Central bankers are worshiped like Demi-gods who are believed to be providing optimum monetary policy prescriptions to economic ailments. But that’s not the case and especially so when it comes to supply shocks. In recent speech Fed governor described the current times as ‘one transitory shock after another’ that are relentlessly plaguing the global economy and creating headaches for policy makers and central bankers. Central bankers have no real instruments to remedy these shocks. In fact, the best response by central bankers to these shocks is to NOT intervene mechanically to these shocks like blindly following Taylor rule to set interest rates.
Illustration - Taylor rule is not a remedy. Disinflation during post Covid era.
And deciphering the inflation dynamics is also getting peculiar for central bankers. For example, the Fed struggled hard to understand how and where is inflation getting entrenched during supply shocks and what index suitably captures the inflation problem (1, 2).
Let’s be clear. Fed doesn’t have ability to move stranded ships at ports or find truck drivers to move cargo on highways or Open Strait of Hormuz or stop the wars raging in Ukraine or middle east or increasing the production of memory chips. Moreover, Fed doesn’t have ability to stop Donald Trump from announcing new tariffs policy in midnight tweets or embarking on ‘liberation day’ type of disruptive policy. All this Fed can only watch in agony and especially with added frustration when President personally degrades Fed technocrats. And agony is worse for helpless politicians and central bankers of foreign countries who are, for no reason, are inflicted with economic misery by people running White House.
Supply Shocks - Man made vs Natural disasters - Hyperglobalization amplifies supply shocks - Breakdown of international order
The supply shocks that began since 2020 can be categorized into man made vs natural. The Covid pandemic and supply chain disruptions that ensued were natural shocks for the most part. But Ukraine conflict, Liberation day tariffs and Iran War are all man made disasters, and even more interestingly, can be observed as menace created by few old men - Putin in Russia, Trump in America and Bibi Netanyahu in Israel. Putin and Bibi have outstanding arrest warrants from international courts for crime against humanity. And Trump? - He’s the man who was charged with nearly 100 criminal counts in America, but given broad immunity by Supreme Court. These are the people who have taken the world to the brink.
It’s convenient to lay all the blame on this trifecta of deranged criminal politicians but the problem is deeper. The problem really lies in breakdown crisis of international order and diplomacy. There are no meaningful institutions to establish some kind of ‘international rule of law’ and even definition of such law is not conclusive. The old institutions - United Nations, WTO, International criminal court etc - are impotent and incapable to provide security and stability to the world. The world itself is based on platitudes that are decayed and obsolete. Democracy, free trade and free markets as being the best & only models of development are such kind of platitudes.
Markets create inequalities and inequalities create political instability. When profit maximizing private sector offshores its production, it doesn’t bother about communities that are left behind jobless - they are left on the mercy of markets but markets don’t provide them with replacement of lost opportunities. These unemployed & underemployed people accumulate, and overtime transform into sociopolitical force but without any intellect who then can be easily manipulated by political conman and demagogues. Democracy in such unequal society produces deranged populists like Donald Trump. This is the paradox of liberal democracy.
On Russia, it’s crucial to remember that shock therapy of market economy unleashed chaos & disasters in Russian society and out of this chaotic carnage emerged gangster capitalism of dictator Putin. Russia could well have been integrated into European common markets and security architecture but it was left to drift astray. On this I would strongly recommend three books - Collapse: The Fall of the Soviet Union, Triumph of Broken Promises and The Godfather of the Kremlin. On Israel, nothing more needs to be said other than that it’s a criminal apartheid State ruled by fanatics which exercises strong influence over western foreign policy.
On elementary level, world doesn't have a balancing mechanism or at least a mechanism that can establish harmony of interests among weak & strong, rich & poor nations. Inequalities are intranational as well as international, of military power as well as economic power. Instead of addressing these national and international imbalances, they are instead brushed aside with platitudes of free trade and sanctity of markets. As long as West (US & EU) enjoyed competitive edge over other nations, they preached the platitudes of free trade to rest of the world. When nations like China attained a competitive edge to beat market players of western economies, the West opened their closet to revive protectionism - industrial policy, tariffs and trade barriers. The mainstream economists who preached free trade started suggesting tariffs.
While Trump’s tariffs are certainly foolish, there however is now a recognition that some sort of protective trade barriers are necessary to protect domestic industry. This was already evident in Biden’s half baked attempt of Industrial policy. And today, EU’s auto industry cannot compete with Chinese EV makers and unfettered free trade may wipe out auto companies of Europe. And going by the free trade doctrine which West itself preached for so many decades - that should be natural order of things. But it is unacceptable. Economics is much more than profit/loss of balance sheets of unfettered market competition. Similarly, certain protective barriers are needed to safeguard nation States from anti-social activities of tech companies. This is reflected in EU’s regulatory fightback against American social media giants & internet companies.
We live in hyperglobalized economy with global imbalances that were allowed to grow enormously over the decades. China is producer of large segment of consumer goods & rare earth minerals, Taiwan is the global center of chip manufacturing, a large portion of global oil & gas flows through specific (& constrained) middle east corridors, US Silicon Valley is the global center of software development & social media empire etc. And although the majority of final products may get produced in few countries, the components of these products (and they are many) are manufactured in complex web of transnational value added supply chains which form another layer of complex & concentrated industrial centers around the world. If these chains break at one or more points, the entire supply chain comes under stress. Hence it was always essential for hyperglobalized economy to function in environment of global peace and stability. If that peace breaks and breaks so violently as we are seeing today, we get upheaval of supply shocks.
The problem is compounded by the fact that now there’re no global institution or an arbitrator that can step in to resolve the disputes/grievances of parties or to deter a State from making aggression. The world becomes free for all fighting match where parties - nations & economic blocs - exercise their powers aggressively to attain advantage over others or to defend themselves. This creates environment for military conflicts and trade wars, and Supply Shocks are automatic outcome of that. And at the end of the day, there’s no winner from these supply shocks but the nations who’re already poor and backward are the biggest losers.