Inflation and interest rates.

[red750]

I know noting of economics, so this will no doubt highlight my ignorance, but can someone explain how, when inflation is increased by outside forces, such as the middle east crisis and the increased cost of fuel, that punishing the victims by increasing the interest rates is going to solve the problem? Surely this will only push prices, thus inflation, higher.

[facthunter]

I agree. You  raise a very Pertinent Point. Interest rates are a very blunt instrument.. Nev.

[Marty_d]

I'm not an economist either but I think it's intended to suppress demand.

The basic idea is that forcing people to pay more on their home loan leaves less money for other things (yes I know - like food and medical costs) so demand across the economy goes down, supply remains the same, so this is meant to push prices down.

That's what I think anyway - happy to be corrected by someone who actually knows.

[octave]

My understanding is that raising interest rates is supposed to prevent runaway inflation.  

 

"Increasing interest rates lowers inflation by making borrowing more expensive and saving more attractive, which reduces consumer and business spending. This decreased demand slows economic growth, cooling the economy, and reducing pressure on businesses to raise prices, ultimately lowering inflation."

 

It does, however, inflict financial stress on people who are struggling.  The ordinary person suffers for something they have little control over. In this case, the orange ones Iranian adventure. 

 

On the subject of interest.  Let me strenuously state that my worldview is not dictated by total self-interest.   In my case, I retired early, and I am living off my super.  Since the orange one is wrecking the world economy, I have pulled out my super, and it is all now in term deposits. This money has to last me a little while longer.  A rise in interest rates for me personally is a bonus. To stress again, I do have empathy for mortgage holders.

 

 

[red750]

14 minutes ago, Marty_d said:

I'm not an economist either but I think it's intended to suppress demand.

I understand that, but it is counter productive when increased demand is not the cause. When just trying to meet your daily requirements costs more, why push the prices even higher?