Inflation/ interest rates

[hooplahoop]

Please someone explain how putting up interest rates helps lower inflation. Especially if inflation is caused by rising food prices / energy costs . Surely the Price of pasta is not going to decrease just because of interest rates ? Thanks

People buy less as it costs more. So a surplus of 'stuff' isn't sold, therefore the price comes down as retailers compete to get rid of it.

Plus people save more as, in theory, it's more worthwhile. Save more = spend less.

Thank you . I think I get it , so they want to encourage people to spend less to reduce demand . I understand that for cars/ fridges / handbags , but food costs are much harder to reduce - and that seems to be one of the hotspots ?

@hooplahoop

Thank you . I think I get it , so they want to encourage people to spend less to reduce demand . I understand that for cars/ fridges / handbags , but food costs are much harder to reduce - and that seems to be one of the hotspots ?

All the supermarkets are keeping profits up. Same with fuel. Fuel went up 0.5p on our company fuel card last week (effectively we pay just above a wholesale rate), yet the local garage put the rate up 2p a litre. A few weeks ago the rate went DOWN 5p/litre, yet the garages stayed the same. When folk spend less, the price will go down.

what confuses me though is surely people spending less due to higher mortgage costs etc will only lead to businesses collapsing due to less customer spending pushing up unemployment and potentially leading to a recession ? ?

It always seems to be a cruel way to do it.

Raise interest rates so people's mortgages and debts cost more so they have less money to spend.

Don't forget we've been warned off asking for a pay rise to help cope with higher fuel bills too .

If wages keep pace with inflation I don't see the issue for the ordinary person. The only people who lose out to inflation are those with large cash reserves which is very few as even the rich invest most of their money

It's true that interest rate rises don't work against supply side factors.

It's also true that a decade of extremely cheap money will push up demand. Too muh much chasing after too few things.

Depends on whether prices are rising due to supply or due to demand.

I.e. if it's because raw material prices, transport costs and wages are rising, then it's supply push inflation.

However if it's because people have money in their pockets and want to spend it then that's demand pull inflation.

Increasing interest rates tackles the latter but not the former.

Thank you . All the comments have really helped. So if interest rates are going up , the thinking is we’re in demand not supply side inflation? Just not sure I agree with that . Although I suppose some people saving through working from home are ready to start spending again on holidays and stuff . I realise that’s not everyone!

I'm glad you asked this question as I struggle to understand it too.

I don't see how raising inflation so that Spend more on household bills including food every month will help the economy. I'll no longer be able to do anything fun. I now I'm lucky in the fact I can work extra to pay for the increase in bills, but I'm already working 50-55 hour weeks to keep up and so cannot work anymore to pay for fun stuff.

I'm sure I won't be the only one and therefore small business will go bust, people will be made redundant, more people will lose homes etc and society will come crashing down that bit further. I understand the supply and demand thing but so many people did have the funds to spend loads anyway.

My wages have risen in line with inflation for about 15 years! I can't see how this helps anyone apart from the rich as their savings will increase etc.

Different people and different supplies will have different inflation.

My OH's hobby is model railways and prices have gone through the roof, that's simply demand pull inflation as so many people got into the hobby during lockdowns so are competing against eachother to buy things for the hobby. That includes second hand stuff, and of course, there's no supply push inflation of normal people selling unwanted/used items as they'll simply sell at what the market demands.

Of course, some people with low/no income won't be able to splurge on hobbies.

So for some people/goods it's demand plus, and for some it's supply push. Covid has really changed the thinking as, hate to say it, but a lot of people have done well out of covid, either due to furlough/grants, or saving money on commuting etc.