Prices are rising at 6% a year, well above the 2% target. Compare three ways to bring inflation down.
Raise interest rates
- Savers: Earn more on their savings.
- Borrowers and firms: Loans cost more, so spending and investment fall.
- Inflation: Lower demand eases demand-pull inflation within a year or two.
Higher rates cut demand. They work fairly quickly but can slow growth and raise unemployment.
Let the currency rise in value
- Consumers: Imported food and fuel become cheaper.
- Exporters: Their goods become dearer abroad, so sales may fall.
- Inflation: Cheaper imports reduce imported and cost-push inflation.
A stronger currency works well for an economy that imports a lot, like Singapore, but hurts exporters.
Fund productivity improvements
- Firms: Lower costs per unit from better skills and technology.
- Workers: Higher productivity can support higher wages.
- Timing: Takes years, so it will not cut inflation soon.
Supply-side measures reduce cost pressures in the long run but are too slow for a sudden spike.