I do not understand in the current post covid scenario, where inflation is being caused primarily because of businesses and utilities increasing prices across the board, how federal or national reserve banks increasing wholesale interest rates does anything at all except drive people to the wall?
It would seem that Inflationary pressures today are nothing to do with discretionary spending so how does increasing Interest rates help and not hurt more?
TIA
In: Economics
You’re referring to what people are calling “greed-flation”, which is when a business takes advantage of the economic environment to raise prices without any sort of supply chain reason to do so. This is certainly happening, but it is a *response* to actual inflation, not the driving force behind it.
Inflation initially happened for boring, regular reasons, like supply chain issues and an injection of “cheap” money into economies around the world. It’s actually a textbook example of inflation: the supply chain got hit with a shock in a few key places (you may remember building materials were sky high, then computer chips) which had a ripple effect throughout the economy. Things get more expensive due to regular old supply and demand.
The textbook response is to “slow down” the economy by increasing interest rates so that you don’t get an inflation death spiral. If money is more expensive to get a hold of (bank loans, credit card rates, all way up), you are incentivizing people to hold onto their cash instead of spending it. This directly combats the inflationary environment of “spend now before it becomes even more expensive!”.
Again, it is correct to say that greed-flation is amplifying the effects of normal inflation and making things worse, but it is not the main reason these things are happening, and the government is not wrong for raising the rates.
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