Supply shocks propagate into inflation through direct, indirect and second-round effects, with second-round effects being the most important for monetary policy.

_{by Witness Simbanegavi and Mokgabiso Tshenkeng}

• Supply shocks propagate into inflation through direct, indirect and second-round effects, with second-round effects being the most important for monetary policy.
• The direct effects of supply shocks are easily identifiable in inflation data. Indirect and second-round effects are harder to detect in real time, partly due to staggered price adjustments or the long and variable lags in behavioural change.
• A historical decomposition (using a structural vector autoregression model) shows that second-round pressures have become smaller since around 2017.
• The current shock is large and persistent, presenting material risks that expectations could de-anchor, allowing the shock to become embedded in inflation.
• Given identification challenges, policy will be guided by informed judgement, drawing from experiences of prior supply shocks, analysis of pass-through of expectations to prices, and monitoring the speed and size of first-round effects.