So I keep hearing the party line about how it is necessary to increase interest rates in order to contain rising inflation. I just don’t understand it as an explanation? I see that it is an advantage for people with savings and fiscal assets, and in increased liability for anyone with consumer credit debt or a mortgage. Can anyone explain how it helps to curb inflation?
In: 1
Increasing interest rates makes it more expensive to borrow money, and more favorable to save money.
In either case, the result is the same – less spending. Makes sense, right?
Since demand-pull inflation is due to demand for goods exceeding supply of goods, anything that decreases spending will help to slow or reduce inflation.
Latest Answers