How inflation works: why your money buys less every year
Interest rates: how a central bank slows inflation, and what it costs
When prices rise too fast, a central bank changes one number, and a year or two later prices calm down. Which number, and who pays for it?
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1
The central bank cannot set the price of ice cream. It moves one number: its own interest rate, which sets what money costs the banks. To fight high prices, it turns that rate up, from 1% to 5%.
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2
Every bank in the country follows. Miva's bank used to ask 5% a year on a loan. Now it asks 9%.
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