Twenty-five years ago, the Bank of England was granted independence from HM Treasury. The first decade of that independence was largely uneventful. Inflation hovered around its target of 2%. Growth was stable, investor confidence high, and the public finances in good health. The “golden years” of macroeconomic policy and central banking had arrived.

Since then, however, central bankers have not had their challenges to seek.

The 2008/09 financial crisis saw interest rates drop to what were then unprecedentedly low levels. New and non-conventional monetary policy measures, including quantitative easing, were added to the mix. Far from being temporary these measures lasted for more than a decade until, in 2020, central banks unleashed a new wave of support in response to the Covid-19 pandemic. In the UK, the Bank’s interest rate fell to just 0.1% in March 2020.

But we now face an economic shock of a different kind. In 2008 and in 2020, the concern was inflation undershooting its target. This year, inflation is projected to reach double-digit percentages with the worst supply-side shock since the 1970s.

New data from the Official for National Statistics already show the UK’s consumer price index (CPI) inflation rate at 9.1% – the highest in 40 years. The UK is not alone. Inflation in the eurozone is tracking at over 8%, the highest rate in the single currency’s history. Of 25 Organisation for Economic Cooperation and Development countries, only three have seen their growth forecasts improve these last six months.

The spike in inflation is driven by three factors. First, disruptions to supply chains caused during the pandemic continue to push up producer costs, particularly in key manufacturing sectors. Second, there is a large, and growing, labour supply shortage. A lack of workers, and particularly workers with the right skills, puts pressure on wages as firms seek to fill vacancies. Wage increases then often get passed on to consumers via higher prices.

Third, and most critically, Russia’s invasion of Ukraine, and the sanctions imposed on Putin’s regime, have led to a sharp increase in energy and food prices. Soaring utility bills and petrol prices are behind a significant amount of the jump in inflation. Household services (including energy bills) and transport account for more than half of the increase in the recent inflation figures.

The spike in prices is fuelling wage demands across the economy, with trade unions arguing that, without pay increases, people will see their living standards decline. This squeeze is particularly challenging for those on low earnings who typically spend a greater share of their income on the very items seeing the biggest spike in prices. It is important to remember that, even if inflation does fall back, we’ll all be permanently poorer as a result of this shock to the cost of living.

Demands for higher wages worry some economists, however, who are fearful of a wage-price spiral. Here an increase in wages causes further increases in prices and so on. Others argue that, without adequate pay awards, economic confidence will be further weakened, labour market shortages will increase, and the economy would head for a sharper slowdown.

Whilst some might argue that central bankers could – and should – have acted more swiftly at the first signs of rising inflation, this seems overly harsh. Hindsight is a wonderful thing, and there is little that central bankers, with the relatively blunt tools that they have, can do to offset a global supply shock. It is easy to forget too that just six months ago, large swathes of our economy were still operating under Covid restrictions and huge uncertainties.

The $100 question is, ‘what next?’. On the one hand, if the Bank seeks to increase interest rates too quickly it runs the risk of pushing the UK into a recession (or a deeper recession). Many economists have concerns about how resilient the UK economy will be to a slowdown, having only just recovered to pre-pandemic levels of activity. On the other hand, a more passive approach runs the risk of inflation expectations shifting higher and a further depreciation in the value of sterling.

I certainly don’t envy the decisions that policymakers face. The sooner we return to that “golden” – and much more boring – age of macroeconomic policymaking the better.

Graeme Roy is professor of economics at the University of Glasgow’s Adam Smith Business School