# R10 | anthropic/claude-haiku-4.5 | run 2

## 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 (demand-pull inflation), rising production costs (cost-push inflation), and expectations about future price levels [aeaweb.org](https://www.aeaweb.org/articles?id=10.1257%2Fjel.20251429). Central banks control inflation primarily through interest rate adjustments and, when necessary, alternative tools like asset purchases and forward guidance [federalreserve.gov](https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm).

## Causes of Inflation

**Demand-Pull Inflation**

Occurs when aggregate demand for goods and services exceeds aggregate supply, driving prices upward [rba.gov.au](https://www.rba.gov.au/education/resources/explainers/causes-of-inflation.html). This creates a "too much money chasing too few goods" scenario.

**Cost-Push Inflation**

Results from rising input costs for production—such as labor, raw materials, or energy—that increase the price of goods and services [clevelandfed.org](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation).

**Inflation Expectations**

When households and businesses expect higher future prices, they adjust spending and wage demands accordingly, creating self-fulfilling inflation pressures [clevelandfed.org](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation).

## Central Bank Tools for Controlling Inflation

**Interest Rate Adjustments (Primary Tool)**

The Federal Reserve adjusts its target for the federal funds rate—the overnight borrowing rate between banks—to influence broader lending rates [federalreserve.gov](https://www.federalreserve.gov/aboutthefed/fedexplained/monetary-policy.htm). When inflation is high, the Fed raises rates, making borrowing more expensive and reducing demand. When inflation is too low, the Fed lowers rates to encourage spending and investment [clevelandfed.org](https://www.clevelandfed.org/center-for-inflation-research/inflation-explained-your-guide-to-inflation-basics/what-causes-inflation).

**Reserve Balance Interest Rates**

The Fed can adjust the interest rate it pays on reserves that banks hold, influencing the federal funds rate without direct intervention [federalreserve.gov](https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm).

**Quantitative Easing and Asset Purchases**

During severe downturns or when conventional tools are insufficient, central banks conduct large-scale asset purchases to inject liquidity into the economy or reduce it to combat inflation [federalreserve.gov](https://www.federalreserve.gov/aboutthefed/fedexplained/monetary-policy.htm).

**Forward Guidance**

Central banks communicate expectations about future policy actions to shape public and business expectations about interest rates and inflation [federalreserve.gov](https://www.federalreserve.gov/aboutthefed/fedexplained/monetary-policy.htm).

**Balance Sheet Composition and Fiscal Coordination**

Central banks can adjust the size and composition of their balance sheets and coordinate with fiscal authorities through dividend distribution or debt monetization when necessary [aeaweb.org](https://www.aeaweb.org/articles?id=10.1257%2Fjel.20251429).

The Federal Reserve targets 2% annual inflation, measured by personal consumption expenditures, as consistent with both stable prices and maximum employment [federalreserve.gov](https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm).

How do you think recent global supply chain disruptions have influenced which inflation causes central banks face today?
