The rapid imposition of economic sanctions on Russia has been impressive in its scale and the unity of action. In time, they will offer the carrot of a path towards normalisation if Moscow credibly ends its aggression against neighbours.

Europe must now find ways to minimise its reliance on Russian energy. The sting of economic condemnation is significantly weakened so long as countries need carve outs to ensure the lights stay on and citizens are warm in winter.

The wider economic response is also crucial. Russia’s war and the economic response combine to impart a sizeable stagflationary shock on advanced economies, which were previously recovering strongly from the pandemic. Finance ministries and central banks have an extraordinarily difficult task in managing policy in economies already struggling to control inflation.

The shock is inflationary because already elevated oil, gas and food prices have jumped, pushing commodity prices to their highest since 2008. It is directly contractionary for industries having to restrict business that is under sanctions. It also indirectly slows growth by squeezing incomes as prices rise, adding reasons for households and companies to be cautious with spending.

A stagflationary shock is a nasty dilemma for policymakers. Too little response to inflation will embed rapidly rising prices into corporate expectations of what consumers will tolerate and the pay increases they need to offer. No one benefits from any sort of wage price spiral. But being too concerned about inflation will weaken growth, could cause recessions and, at worst, offer Russia a propaganda victory.

The shock to growth seems likely to be more powerful than that to inflation, so whatever monetary or fiscal tightening was planned, the authorities in the US, eurozone and the UK could do a little less now. But everyone has to be nimble because this assessment is tentative and might easily be wrong.

Practically, this means the US would make minimal changes to its plans to tighten policy because it has the most intense inflationary pressures and will not be hit as hard by higher energy prices. Indeed, high oil prices tend to encourage US private sector investment. Eurozone central bankers would need to be much more cautious, given this economy is a huge net energy importer and underlying inflationary trends were weaker.

The policy dilemma is perhaps most acute in the UK, which has inflation set to rise to over 7 per cent, unemployment at pre-pandemic levels, shortages of labour and still loose monetary and fiscal policies. Just before Russia invaded, the IMF proposed a minor revolution in economics to deal with the UK’s economic circumstances. Raise taxes now rather than later, the fund recommended. It said the action would cool inflation faster than higher interest rates, which have their maximum effect about a year after implementation, and poorer Households could be protected by exempting them from tighter fiscal policy. Using fiscal policy as the active tool for damping demand is not something many have suggested since crude Keynesianism went out of fashion.

A lively debate about the tools of macroeconomic management has been cut short by Russia’s actions. Now is not a time for economic experiments and tax increases that would intensify the horrible squeeze on incomes faced by UK households. For now, the job of managing the cycle and the trade-off between the inflationary and contractionary effects of this crisis in the UK and elsewhere should fall to central banks.

The populations of advanced economies should cut the central bankers some slack as they go about this miserable task. They will do their best to balance inflation and growth, but stagflationary shocks are circumstances where mistakes are highly likely.

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