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Inflation and the Cash Rate
What is Inflation?
Inflation is a general increase in prices and a decrease in the purchasing value of money.
When prices rise, each unit of currency buys fewer goods and services.
In contrast, deflation is a decrease in the general price level of goods and services.
How is Inflation Measured?
Inflation is usually measured by the Consumer Price Index (CPI), which tracks the prices of a basket of goods and services purchased by individuals.
The percentage change in the CPI over time indicates the inflation rate.
What is the Cash Rate?
The cash rate is the interest rate set by a country's central bank for short-term borrowing between banks.
It is a key monetary policy tool used to influence inflation and economic growth.
How Does Inflation Affect the Cash Rate?
When inflation is too high, central banks can raise the cash rate to discourage people from spending and encourage them to save more.
This reduces the amount of money in circulation, which can help lower prices.
Conversely, when inflation is too low, central banks can lower the cash rate to encourage spending and boost economic growth.
What are Some Examples of How Inflation Affects the Cash Rate?
- In 2023, the Reserve Bank of New Zealand raised the cash rate to 5.5% to combat high inflation.
- In 2020, the Federal Reserve lowered the cash rate to nearly 0% to stimulate economic growth during the COVID-19 pandemic.
How to Find Out What Goods and Services Were Worth in Today's Money When Adjusted?
You can use an inflation calculator, such as the one provided by the Bureau of Labor Statistics, to find out what goods and services were worth in today's money when adjusted for inflation.
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