War in the heart of Europe comes at an already difficult time for the global economy. The recovery from the coronavirus pandemic is not yet complete. Inflation is high and central banks are concerned that temporary, pandemic-related, supply chain blockages could set off a self-sustaining cycle of persistently higher inflation. Russia’s invasion of Ukraine, and its attendant impact on global commodity prices, will make every aspect of this outlook harder to deal with. The parallels with the 1970s, when the oil price shock from the Yom Kippur war combined with existing inflationary dynamics, raise the worrying spectre of stagflation.

For the moment, the order of the day in markets is volatility. Asset prices have swung dramatically as traders attempt to understand the latest news. Gold and stock prices, as well as oil, have whipsawed. That will probably continue as more details emerge from the fog of war and investors digest what they mean for the outlook. Indeed, natural gas prices fell on Friday as US and European sanctions packages focused on oligarchs and banks rather than energy. That reluctance to target energy is understandable, if morally regrettable, given the dependence of much of Europe, and especially Germany, on natural gas from Russia — and the political sensitivity of US president Joe Biden’s re-election chances on petrol prices.

Nevertheless, prices have still risen overall as traders anticipate disruptions to supply, whether accidental or deliberate, from the fighting. They are factoring in, too, the possibility that pressure will mount for even more aggressive sanctions such as cutting Russia off from the Swift interbank payments network. Benchmark oil prices reached $106 on Thursday, the first time they have risen above $100 since 2014, before falling back.

That will add fuel to the inflationary fire. The war amounts to a supply shock — reducing the capacity of the global economy to produce goods and services. Such crises hit growth while raising inflation. That is harder for central banks to deal with than a fall in aggregate demand, when spending retrenches. Lower interest rates may be able to encourage investment and consumption in the short term, but they cannot do much to get more fossil fuels out of the ground.

There will be some, smaller, offsetting impact on consumer and business confidence. Central banks are likely to continue to pursue tighter monetary policy, to prevent inflation from feeding off itself. But a pause in their plans, to see how the situation develops, would be sensible for the short term.

Fiscal policy will ultimately have to take most of the burden of shielding the most vulnerable from the impact of higher prices. Government spending cannot ameliorate the effect of higher commodity costs but it can ensure they are shared between the whole of society rather than leaving just a few to shiver and starve from the combined impact of higher food and fuel prices — Ukraine is a major wheat exporter as well as playing host to gas pipelines. Transfer payments, funded by general taxation, will be needed.

In the longer term, the invasion will shift the composition of government spending. Not only should it accelerate attempts by western economies to wean themselves off fossil fuels, especially those imported from Russia, but it likely means the end of the post cold war “peace dividend”. Defence investment will be added to an already long list of priorities for government spending. Investors have long feared a return to the stagflation of the 1970s; few, however, anticipated that it would come alongside a return to war.