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Economics question...

Could someone please explain to me why, if prices on everything go up due to inflation and people are having trouble affording the things they need, why does the gov't raise the interest rates and tell us it is to help curb inflation? Seems to me by raising the interest rates, they are adding to the list of things we can't afford.

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scorpiolovedeep · 46-50, M

Inflation is usually measured by the CPI.

Consumer Price Index provides data about price increases for households on average (by comparing a basket of goods).

If CPI is high , they will increase the rates.

They adjust the interest rates to fasten or slow down the economy to achieve its inflation target of 2-3 per cent over the medium term.

If nothing else changes, higher interest rates lower spending and increase savings in the economy.

whowasthatmaskedman · 70-79, M

@scorpiolovedeep The cut down version is that "all other things being equal" (watch that phrase, it matters.) Raising interest rates lowers household spending and that lowers economic activity and that stops wages and prices rising over time.
One could argue that a 2 year pandemic and supply chain disruptions mean this time all other things arent equal. But economics only works perfectly when you keep the people out of it.😷