How Are We Fighting Inflation Around the World?

Yesterday, we looked at inflation around the world. Today we can see how countries are using interest rates to fight it.

This NY Times map uses arrow length to show the size of recent interest rate hikes:

The NY Times also tells us that at least 45 countries have elevated rates this year.

Inflation and Interest Rates

Perhaps though the last two columns, below, say it all. We would expect the bar in the interest rate column to be accompanied by an inflation rate bar that corresponds. The U.S. stands out as having one of the highest inflation rates:

Meanwhile, we will soon have to draw a bar next to the eurozone. After not raising rates for 11 years, in a surprise announcement, they said rates would rise by a quarter point during July and then again in September. The reason is 8.1 percent inflation–much higher than the 5.3 percent projection in our NY Times graphic.

Our Bottom Line: Fighting Inflation

Everyone refers to “low interest rates” but never really says what they mean. If you are the Federal Reserve, then probably you are referring to the fed funds rate. The interest rate that banks charge each other, the fed funds rate is the rate that lets banks decide how much to charge you and me. Like any business, to be profitable, their prices need to exceed their costs. So, if the cost of borrowing is the fed funds rate, then the price to lend us money will be higher.

As a result, it will be more expensive if we borrow to buy a car or a house. Similarly, the interest rate on our credit card balances will go up. As economists, we can return to the law of demand. When price is up, the quantity we are willing and able to buy goes down. And that is precisely what the central bankers around the world are hoping for. With fewer dollars and euros and pounds chasing goods, prices should stop going up.

Of course. as we saw yesterday, central bankers cannot unravel the supply chain snarls that are raising prices from shortages or the Ukraine war that is nudging the price of oil upward. But still, higher interest rates could make a difference.

My sources and more: Most of today’s interest rates facts came from this NY Times article and, for the eurozone, from CBS. My go-to though is Steve Hanke. Here, he has some inflation history that is excellent.

Originally published at https://econlife.com on June 20, 2022.