Should the government compensate consumers for cost of living shocks?

Governments around the world are cutting taxes on petrol or fuel, including in Germany, Italy, Spain and Canada. The UK government has come under pressure to do the same, which is hardly surprising as the crisis may leave the typical British household £500 worse off. But the problem with this approach should be pretty obvious. Prices are rising because there is a reduction in the amount of oil and gas being produced. Prices therefore need to rise to discourage the demand for oil and gas to avoid physical shortages. If governments take measures to subsidise prices by taxing fuel less, then demand is discouraged less and prices will need to rise further, or there will be rationing. Each individual government is tempted to cut taxes on fuel, because if they alone did so then their consumers would benefit, and other countries would only suffer a small increase in global prices. But if all countries do the same the policy is self-defeating: prices simply rise further to offset the…