Raising interest rates can help to control inflation by making borrowing more expensive. When interest rates are high, it becomes more costly for businesses and consumers to borrow money, which can lead to slower economic growth. As a result, there is less demand for goods and services, which can help to keep prices stable. Additionally, higher interest rates can attract foreign investment and strengthen a country’s currency, which can also help to curb inflation.

However, the effects of interest rate hike may take some time to be fully felt, and in some cases, it may not be the only solution to control inflation and the central bank may use other monetary policy tools in conjunction with interest rate hike to control inflation.

What’s Inflation?

Inflation is an economic term that refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks, such as the Federal Reserve, use a variety of tools to monitor inflation and can use monetary policy to influence the rate of inflation. Typically, inflation is measured by the Consumer Price Index (CPI) or the Producer Price Index (PPI), which track changes in the prices of a basket of goods and services. Inflation is generally considered to be a sustained increase in the general price level over a period of time.

Inflation is an important economic indicator as it can have a significant impact on the overall health of an economy. High inflation can lead to economic instability, as businesses and individuals may struggle to keep up with rising prices. It can also lead to a decrease in consumer and business confidence, which can slow down economic growth. On the other hand, low inflation can indicate that an economy is weak, and may lead to deflation. Deflation is a sustained decline in the general price level of goods and services, which can lead to an increase in unemployment and a decrease in economic growth. Central banks attempt to maintain low, stable inflation in order to promote economic growth and stability.