A Supply Shock Has Two Acts. We Keep Watching Only the First One
Higher prices are the headline. The slow erosion of demand that follows is the part that actually decides how rough the landing gets. Picture a negative supply shock the way most coverage frames it. Costs jump, growth gets pinched, and the economy ends up in that uncomfortable spot where prices climb while activity drags. That framing is not wrong. It is just incomplete, and the missing half happens to be the half that matters more for where growth goes next. Having spent years studying economies at very different stages of development and having sat on the Federal Open Market Committee as these questions played out in real time, the pattern I keep coming back to is this: A supply shock is not one shock. It is a first shock that can summon a second one. The initial blow lands on supply and shows up as inflation. Then, with a lag, it can reappear on the other side of the economy as a negative demand shock. And that delayed second act is usually where a real slowdown takes root. The ear...