Suppose the British economy is at long run equilibrium when it suffers an external shock due to a 15% increase in the price of oil, believed to be permanent.

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As seen in Fig 2, cost-push inflation occurs with a leftward shift of the aggregate supply curve, which is independent of any movements in aggregate demand. Because the demand for oil is highly price inelastic, producers know that they can pass on the increased costs of the oil directly to the consumer, without the need to absorb them at the firm level...
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They may also cut back on production slightly in the short term in order to avoid a current surplus, however, as the demand for oil would not be expected to drop significantly, this approach would be a cautionary one. A rise of the price of oil by 15 percent would stimulate a single shift in the AS curve, which is known as a supply shock ? whereby there is a temporary inflation taking place while the price rise is passed through the economy...
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