Posted on: June 12, 2022 Posted by: maira salman Comments: 0
Increasing interest rates would halt rising inflation?

It is very difficult to run away from the destruction of inflation. The US government reported on Friday that the Consumer price index got speed in May and went up at a 12.3% annual rate. Due to this increase costs of necessities becoming alarming and unaffordable.

The seed of inflation has been implanted in the economy and influenced more of the items that are most important for living just like food, clothing, transportation, and medicine.

The main item of the consumer price basket is renting or owning a home which has become extremely daunting due to rising costs. Another problem is when the price goes higher it stays up.

The Fed wants to average inflation at around 2% per year but it looks impossible. The only item home or shelter is causing a rise in CPI by 2.4% per year.

Gas and food are flexible items but they have been consistently causing inflation in recent months.

According to the Atlanta FED based on today’s CPI report, the higher prices increased at an annual rate of 7.5% in May and they stood at a 6.8% annual rate, 40 years high.

Basic Necessities

Primary Residence

Food and Beverages

Cars and Trucks

Household energy

Motor Fuels

According to an analyst, these five items account for 64% of the CPI’s market basket.

What do people want?

The demand for these items is being reduced through an increase in interest rates but analysts see it as a difficult process.  

Home, food, and heat the house in a cold climate are the most basic requirements of residents that need to be fulfilled at any cost.  

Limited supply is the main cause of rising inflation, not demands. If we look at the causes of limited supply, we will come to know that COVID-19, the ongoing Russia-Ukraine war, and climate matter a lot in terms of droughts and heat waves.

According to analysts, the price of a home is the real contributor to the CPI basket. Increasing interest rates will make the demand limited for such necessities without causing any increase in supply.

The supply of new cars and trucks will also be made limited through an increase in interest rates.

Worldwide Issue 

According to analysts, this strategy of increasing interest rates could work better if current inflation would not be a global issue.

Those suppliers who are not affected by US interest rates can work more and try to satisfy the demands in the US.  

The only way to bring back the balance of supply and demand is to decrease the demands at any cost.

But if we see it in detail, it means millions of people are going to be jobless.