In Brief: The Fed's Inflation Fight (with Greg Ip)
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How Does Raising Interest Rates Help Inflation?
Inflation results from the demand for goods and services growing faster than supply. So how do you control demand if it's growing too fast? Well, you make people less willing to spend. And one way you do that is raise interest rates. When interest rates go up, people aren't so likely to buy a house or buying a car. The problem is that what works at the mark economic level may not be true at the macro economic level. inflation is not just what one or two prices are doing, it's what all prices are doing on average.
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