how do high interest rates reduce inflation?

Question

Please explain how higher interest rates helps reduce inflation? No matter what, people still have to buy shit. So how does high interest rates get people to spend less? People still need to buy homes, cars, food regardless of what the interest rate is. Those are kind of necessities, so shouldn’t the government do more to make it more affordable?
And if businesses are paying more for a product, then they have to charge the customer more. They can’t charge less just because people aren’t buying. If they do they won’t make any money themselves.

I’m confused. Please explain it to me.

In: Economics

Answer 1

I think you’re overestimating how much people NEED to spend. Unless you’re homeless, you don’t NEED to buy a new house (or if you do, you don’t NEED to build a brand new house on the outskirts of town necessitating new roads, pipes, electrical girdwork, etc) when you can buy an existing house for cheaper. You don’t NEED to buy a brand new Tesla when an older model would be much cheaper. You don’t NEED to buy new clothes, new hair products, new tvs, new furniture, etc. 

Our economy is based on massive overspending and over consumption. Higher interest rates discourage people from engaging in unnecessary spending. If you’re going to pay a lot more for something today than you might spend in the future, you will probably put off that purchase unless you’re in dire need of it.  

Higher interest rates shouldn’t affect the stuff we need to survive like food, etc. because most people are not taking out hundreds of thousands of dollars in loans for weekly groceries.

And yes, businesses can charge less when people aren’t buying. It’s called supply and demand. Part of what you’re paying when you buy anything is just pure profit. You’re not only paying for the cost of the inputs and overhead. If a company isn’t selling any of product A, then they aren’t making any profit at all. Dropping the price and reducing the profit, and making less profit per unit but still making SOME profit, is better than making zero profit at all if no units are moving.