Please help me. I am VERY confused on how increasing interest rates will lower inflation. It seems to me that increasing interest rates would also increase inflation.
For example, unless a farmer has the cash on hand for harvesting the crops, the farmer will need to borrow the money to pay for the fuel, equipment, extra labor, transportation to market and all the other essentials needed. If the interest rates are higher, the farmer’s cost will be higher and will need to demand more money for his crops in order to pay for the higher costs. Isn’t that inflationary?
Also, unless a manufacturer has the cash on hand to purchase the raw materials for production, the manufacturer will need to borrow the money, at higher interest rates, to purchase these materials. This will cause production cots to be higher and therefore the manufacturer will need to demand higher prices for the product to make a profit. Is that not inflationary?
If a consumer does not have the cash on hand to purchase a house or car or appliances, won’t that consumer need to borrow the money to pay for these items at higher interest rates, which will cause the payments to be higher? Isn’t that inflationary?
If raising interest rates to lower inflation will cause things to be more expensive, this seems to be counterproductive… Just saying.
It seems to me that raising interest rates to lower inflation will only benefit the banking system, and we all know how much they need the help in controlling the money supply.