Right now, most of the inflation fighters are in the developing world. In Brazil, Russia, India and China (the BRICs), more expensive food and energy and growing demand are fueling price increases. In Peru and Mexico, the story is the same although the numbers differ. As a result, monetary authorities are raising borrowing rates.
The Economic Lesson
Central banks are the bankers’ banks that oversee a country’s supply of money and credit. For economic growth, you need the right balance between money and production. If the balance is wrong, then the result is recession or inflation or both.
By contrast, inflation involves rising prices that can spiral out of control. To stop their ascent, central banks try to use a diminished money supply or slowly growing money supply and higher interest rates to reign in economic activity. With less demand throughout the economy, they hope that prices will stop rising.