What can the government do about the cost of living?

If you are going to tighten monetary policy, as we are by increasing interest rates, you should be very careful not to over-tighten fiscal policy by increasing taxes, writes Hamish McRae

Taxes are going up to the highest level relative to GDP since the late 1940s (Reuters)

The cost of living crisis has become political. Governments may not be responsible for inflation itself, but they are certainly responsible for their response to it. And in the UK that response has been weak. Inflation on the consumer price index measure is 9 per cent, while on the traditional retail price index it is 11.1 per cent. That is higher than the US, where it is 8.6 per cent, and the eurozone average of 7.4 per cent.

A survey by the Office for National Statistics on Friday confirmed that 77 per cent of British people are worried about the situation. So what happens next?

For a start, interest rates will rise more swiftly than expected even a few days ago. This is a seismic global shift. On Friday, the publication of the US inflation figure pushed up market interest rates there, with the two-year rate jumping above 3 per cent for the first time since 2008. The European Central Bank signalled on Thursday that its rates would rise in the autumn, and that led to a surge in market interest rates for the euro-denominated government securities.