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How Expecting Inflation Can Actually Create More Inflation

The Daily

The New York Times

News, Daily News

4.597.8K Ratings

🗓️ 28 July 2022

⏱️ 29 minutes

🧾️ Download transcript

Summary

To fight historic levels of inflation, the Federal Reserve this week, once again, raised interest rates, its most powerful weapon against rising prices. The move was intended to slow demand, but there was also a psychological factor: If consumers become convinced that inflation is a permanent feature of the economy, that might become a self-fulfilling prophecy. Guest: Jeanna Smialek, a correspondent covering the Federal Reserve and the economy for The New York Times.

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0:00.0

From New York Times, I'm Michael Barrow. This is Adali.

0:07.0

Today.

0:12.0

To fight historic levels of inflation, the Federal Reserve on Wednesday once again used its

0:19.3

most powerful weapon, raising interest rates.

0:24.0

In doing so, one of its biggest goals is to prevent the expectation of higher prices

0:31.0

from actually creating higher prices.

0:35.0

My colleague, Gina Smilak, explains.

0:40.0

It's Thursday, July 28th.

0:47.0

You know, where exactly are we and what has become our long national nightmare of inflation?

1:00.0

We are made way through it, I would say.

1:03.0

We still have extremely high inflation.

1:06.0

The Federal Reserve is trying its very best to raise interest rates to slow down consumer demand

1:13.0

and bring that inflation under control.

1:15.0

Yesterday, we saw them make their second very big rate increase and their fourth increase this year

1:21.0

as they carry out this fight against inflation.

1:24.0

As we've explained with you on the show in the past, as interest rates go up, borrowing money becomes more expensive.

1:33.0

People spend more money on car loans, on their credit card debt, on their mortgages, and as a result, the thinking goes,

1:40.0

they have less money to spend, which is supposed to help bring down prices.

1:46.0

That's the way this is supposed to work.

1:48.0

Precisely. Interest rates go up, spending goes down, lower demand allows supply to catch up,

1:54.0

and when supply catches up to demand, prices moderate.

1:57.0

So that's what the Fed is doing right now.

...

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