# R10 | anthropic/claude-haiku-4.5 | run 1

## Prompt

What causes inflation, and what tools do central banks use to control it? Summarize and cite authoritative sources.

## Response

Inflation results from three primary factors: excess demand relative to supply, rising production costs, and inflation expectations. Central banks like the Federal Reserve control inflation primarily through interest rate adjustments, with additional tools available when conventional methods prove insufficient.

## What Causes Inflation

**Demand-Pull Inflation** occurs when growing demand outstrips the supply of goods and services [Cleveland Federal Reserve](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation). When consumers and businesses want to buy more than producers can supply, prices rise.

**Cost-Push Inflation** happens when production costs increase notably or when goods cannot be produced in sufficient quantities to meet demand [Cleveland Federal Reserve](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation). Rising wages, energy costs, or supply chain disruptions typically trigger this form.

**Inflation Expectations** play a critical role—what households and businesses believe inflation will be in the future influences their economic decisions and actual price behavior [RBA](https://www.rba.gov.au/education/resources/explainers/causes-of-inflation.html). If expectations become unanchored, inflation becomes harder and more costly to reduce [Cleveland Federal Reserve](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation).

## How Central Banks Control Inflation

**The Federal Funds Rate** is the primary tool [Federal Reserve](https://www.federalreserve.gov/aboutthefed/fedexplained/monetary-policy.htm). The Fed raises this overnight borrowing rate between banks to tighten monetary policy when inflation is high, which increases borrowing costs across the economy and reduces spending [St. Louis Federal Reserve](https://www.stlouisfed.org/on-the-economy/2016/november/how-central-banks-typically-control-inflation). Conversely, lowering rates eases policy during weak demand [Federal Reserve](https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm).

**How Rate Changes Propagate** through the economy: Changes to the federal funds rate influence the prime rate banks charge customers, affecting mortgages, credit cards, and auto loans [Cleveland Federal Reserve](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation). Higher borrowing costs reduce household and business spending, cooling demand and inflation.

**Additional Tools** include quantitative easing (large-scale asset purchases) and forward guidance (communicating future policy intentions) [Federal Reserve](https://www.federalreserve.gov/aboutthefed/fedexplained/monetary-policy.htm). The Fed also adjusts the interest rate paid on reserve balances banks hold [Federal Reserve](https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm).

**Anchoring Expectations** is crucial—the Fed works to maintain well-anchored inflation expectations through consistent policy actions and clear communication, which reduces the likelihood that temporary price shocks become persistent inflation [Cleveland Federal Reserve](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation).

How has inflation behaved in your country or region over the past few years?
