Eve, here. Readers who follow business and financial coverage may have wondered why analysis and commentary on the economic and supply chain impacts of the Iran war have focused so heavily on oil and energy prices, with relatively little consideration of other important inputs, such as urea on food prices and supplies, the impact of greatly reduced sulfur, sulfuric acid, and helium on chip production, and the direct and secondary effects of scarce and expensive crude oil on pharmaceutical production and distribution. In this post, we will discuss another manifestation of economists’ preference for drunkenness under streetlight analysis. Their “commodity price shock” model focuses on oil and ignores the effects of other commodity shortages.
This article takes a broader perspective and finds that, not surprisingly, the effects of other commodity shortages can exceed the effects of energy shocks.
Authors: Alvin Lumbanraja, PhD Student, Northwestern University, Sarah Mouabbi, Senior Research Economist, Banque de France, Evgenia Passari, Associate Professor of Finance, DRM Dauphine University, CNRS, and Adrien Rousset Planat, PhD Student, London Business School. Originally published on VoxEU
As geopolitical tensions from Ukraine to the Middle East disrupt global supply chains, understanding how diverse commodity shocks affect the broader economy is becoming increasingly important. This column argues that although oil has dominated policy discussions, recent events show that other commodities also play an important role in shaping macroeconomic outcomes. The authors believe that the effects of stagflation due to disruptions in commodity supply originating from sources other than the oil market are at least as important for both output and inflation.
In recent years, commodity markets have been shaken by a series of unprecedented disruptions. The COVID-19 pandemic, Russia’s invasion of Ukraine, China’s export restrictions on critical minerals, and most recently the closure of the Strait of Hormuz have caused supply shocks across multiple sectors, contributing to soaring prices, inflationary pressures, and increased growth volatility.
The economic literature has long emphasized the importance of supply-side disruptions in promoting business cycles. Since the seminal work of Kidland and Prescott (1982), macroeconomists have sought empirical measures of supply shocks that propagate through production networks. Research also shows that central banks need to carefully calibrate their responses to commodity market disruptions, especially when inflationary pressures are inconsistent with output stabilization (McLeay et al. 2020). However, empirical analyzes of commodity-driven macroeconomic fluctuations remain largely focused on the oil market, and the role of other essential commodities remains relatively unexplored.
In a new paper, we address this challenge by developing a comprehensive framework that constructs proxies for supply and demand across the entire range of goods (Lumbanraja et al. 2026). Our findings show that supply disruptions in non-oil goods affect inflation and industrial production at least as strongly as disruptions in oil, calling into question traditional policies that focus solely on oil.
A central challenge in assessing the macroeconomic impact of a commodity is disentangling supply from demand disruptions. Commodity prices respond endogenously to broader economic conditions, making causality particularly difficult to identify. We address this challenge using text analysis of over 1 million news articles covering 20 commodity markets spanning energy, metals, agriculture, and livestock. Our methodology identifies supply and demand trends at daily frequency while controlling for autocorrelation and both intra- and inter-market spillovers. This framework allows us to accurately measure commodity disruptions beyond the previously undocumented and well-studied oil sector.
Non-oil commodities: An overlooked source of macroeconomic fluctuations
Our study provides two important insights.
First, supply disruptions in metals, grains, and livestock markets can cause macroeconomic impacts comparable to oil shocks. When supply disruptions occur in these non-oil goods, industrial production declines while inflation continues to rise, much like the stagflation dynamics typically associated with high oil prices (Figure 1).
Second, the macroeconomic impact of a disruption in commodity supply varies depending on each country’s commodity trade exposure. Net importing countries face stronger inflationary pass-through and a sharp decline in industrial production, while net exporting countries remain partially isolated (Figure 2). Difference-in-difference estimates that interact with supply disruption measures and each country’s primary product trade balance support this heterogeneous pattern (Figure 3).
Figure 1 CPI and industrial production responses to oil and non-oil disruptions
a) CPI (left: Brent, right: production-weighted non-oil commodity basket)
b) Industrial production (left: Brent, right: production-weighted non-oil commodity basket)
Note: This figure shows the impulse response of CPI and industrial production to one standard deviation supply consumption of a basket of oil and non-oil goods across a panel of 61 countries. Driscoll-Kraay standard errors are used.
Figure 2 CPI and industrial production responses to non-oil disruptions: net commodity exporters and net commodity importers
a) Non-oil net exporters and importers, CPI
b) Non-oil net exports/imports, industrial production
Note: This figure shows the impulse response of CPI and industrial production to a one standard deviation supply contraction in a basket of non-oil goods for net commodity exporters (left) and importers (right) across a panel of 61 countries. Driscoll-Kraay standard errors are used.
Figure 3 CPI and industrial production responses to non-oil disruptions: importers and exporters
Note: This figure shows the differential impulse response of CPI and industrial production to a one standard deviation supply consumption in a basket of non-oil goods, interacted with the normalized trade balance for a panel of 61 countries. Since time fixed effects absorb general global shocks, identification comes from cross-sectional changes in the trade balance within each period. Driscoll-Kraay standard errors are used.
Understand what causes product confusion
What are the factors driving these disruptions in commodity markets? We further categorize the underlying factors into four categories: cyclical developments, geopolitical risks, natural disasters, and climate change, revealing systematic patterns across markets.
Natural disasters emerge as a major trigger for supply disruptions in agriculture and energy. Geopolitical risks primarily affect energy and precious metals markets, but have recently become important for agricultural products as well (see Figure 4). Business cycle dynamics primarily shape demand conditions. Concerns about climate change are increasingly impacting the energy and industrial metals markets.
This classification highlights the vulnerabilities of global supply chains. For example, agricultural markets face an increased impact from weather-related events, while metals and energy markets are particularly sensitive to geopolitical tensions. Understanding these patterns provides valuable insights for both risk management and policy responses.
Figure 4 Geopolitical risk factors
<
Note: This figure plots the breakdown of geopolitical risk themes across product categories for the period 2001 to 2023.
Impact of commodity supply shocks on the business cycle
These results have important implications for how we understand business cycle dynamics. While macroeconomic discussions in recent decades have focused on demand shocks, our research shows that supply-side disruptions, particularly those originating from commodity markets, also play an important role in generating economic volatility. The COVID-19 pandemic clearly illustrates this dynamic. Supply bottlenecks fueled inflation even though aggregate demand remained short. Our results suggest that the pandemic is not an isolated event but part of a broader pattern of supply-driven macroeconomic fluctuations. In this context, the ability to measure a variety of commodity supply shocks and disentangle their effects empirically is particularly valuable for understanding and managing macroeconomic risks.
The uneven propagation of commodity shocks across countries also helps explain the disparity in economic outcomes associated with global disruptions. Countries with different commodity trade exposures are affected differently by the same global shock, posing an important challenge for policy coordination among international organizations. Moreover, commodity shocks can spread beyond the real economy through financial channels. As Eberhardt and Presbitero (2021) show, commodity price shocks can spread throughout the financial system and trigger banking crises, with effects that extend far beyond the direct inflationary effects. Our findings suggest that these financial stability risks may originate from a much wider range of commodity markets than previously recognized.
Policy implications
Our findings have four important implications for policymakers.
First, inflation monitoring frameworks need to incorporate supply conditions across commodities, rather than focusing primarily on oil. The macroeconomic impact of non-oil commodity disruptions is similar or greater, suggesting that narrowly focused monitoring may miss important sources of inflationary pressures.
Second, differences in countries’ commodity trade exposures create asymmetric vulnerabilities and require tailored policy responses. Net importers face greater macroeconomic risks from supply disruptions and may therefore benefit from stronger hedging strategies and diversification of supply sources. In such cases, an effective policy response will need to combine carefully calibrated monetary policy with targeted fiscal measures that directly address supply bottlenecks and reduce uneven impacts across economic actors.
Third, supply chain resilience has become a central macroeconomic concern as geopolitical risks emerge as a key driver of commodity supply disruptions. Policies such as diversifying supply chains for critical goods, expanding strategic stockpiles, providing targeted assistance to vulnerable sectors, strengthening international cooperation through multilateral institutions, and investing in alternative technologies to reduce long-term dependence on vulnerable goods can significantly increase economic stability.
Fourth, our methodology provides policymakers with a tool to detect early warning signals of supply pressures across commodity markets, enabling more timely and better-coordinated responses to emerging disruptions.
conclusion
The traditional focus on oil markets has led economists and policy makers to understand the broader macroeconomic impact of commodity supply shocks. But as geopolitical tensions and climate-related disruptions increasingly threaten the supply of diverse goods, a more comprehensive approach to understanding these shocks is essential to safeguarding economic stability.
By demonstrating that disruptions in non-oil goods can affect inflation and output as strongly as oil shocks, our findings call for a broader perspective on the supply-side forces that shape business cycles. In an era of fragmented supply chains and intense geopolitical competition, such a framework provides a valuable framework for navigating an increasingly complex global economic landscape.
Author’s note: The views expressed in this column are those of the author and should not be interpreted under any circumstances as reflecting the views of the Banque de France or the Eurosystem.
See original post for reference
