Perhaps control is not the right word here: Central Banks aim to manage inflation using the economic levers at its disposal to tweak the economy. One of those levers is setting the interest rates for the country where it is located.
One of the jobs of central banks is to maintain price stability, which means keeping inflation under control while also avoiding deflation.
Inflation is an increase in the general price level of goods and services in an economy over a period of time. Deflation is a decrease in the general price level of goods and services in an economy over a period of time. Both of these can have negative impacts on an economy.
Inflation can erode the purchasing power of money, which means that the same amount of money buys fewer goods and services, which can lead to declining standard of living for the people living there.
Inflation can also create uncertainty and hinder economic growth, because people don’t make long term investments if they think prices are going to increase.
Deflation is the opposite of inflation, and it can lead to a decrease in demand for goods and services. People and businesses may delay purchases because they expect prices will drop in the future. This can lead to a decrease in economic activity and can be difficult to reverse.
Therefore, central banks typically aim for a low, stable rate of inflation, which is often referred to as “price stability.” If a central bank believes that the economy is at risk of deflation, it may choose to pursue expansionary monetary policy, such as lowering interest rates or increasing the money supply, to stimulate demand and prevent deflation.
On the other hand, if a central bank believes that the economy is at risk of overheating and experiencing high inflation, it may choose to pursue contractionary monetary policy, such as raising interest rates or decreasing the money supply, to reduce demand and bring inflation back to target.
This is why we hear a lot of news in the mainstream media about the Fed’s decision to increase interest rates will push the United States into a recession.
A recession is generally undesirable, but a central bank may view a short-term recession as necessary to bring inflation back to the target level of 2%, maintain price stability and thereby maintaining long-term economic stability.
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