Introduction :

the globe has a lot of Economic issues such as unemployment, inflation, and more.

after the second world war, there are a lot of countries exposed to inflation as a consequence, so most people lost their jobs and could not find food to eat, the infrastructure deteriorated, living became very difficult, and the percentage of poverty increased due to high prices, lack of money, high demand and lack of supply, so it was very difficult to adapt to the situation.

Accordingly, a group of countries' governments decided to apply the interest rate strategy which is mean The basic interest rate forecasting strategy is to switch between short-term government bonds and very long-term government bonds based on the forecast of interest rates over a specific period to achieve the maximum price increase of the portfolio.

There are two types of interest rates:-

the first type is the positive interest rate:-

when interest rates are positive there are many benefits for it for example it means there are implications for the time value of money, Today's money is worth more than tomorrow's money. Inflation, economic growth, capital investment, and other forces all contribute to this outlook.

In other words, interest rates are positive because by not consuming today, people have the opportunity to consume tomorrow at higher interest rates. No one will lend interest-free if they can use those funds to buy higher-income capital goods in the future.

such as Zimbabwe.

the second type is negative interest rate :

When interest rates are negative and unconventional for monetary policy instruments. If you have a negative interest rate, depositing cash in a bank will incur a custody fee and you will not have the opportunity to earn interest. The idea is to encourage borrowing and spending, not saving or hoarding.

such as Switzerland, Sweden, Denmark, and Japan.

so what is inflation?

The definition of inflation is the rate of price increase over a period of time.

One of the most public examples of real inflation is the price of flour. In 1913, the price of a cup of flour was about 36 cents per cup. 100 years later, in 2013, a cup of flour costs $ 3.53, which is almost ten times that price.

There is Inverse relationship between inflation and interest rate, the brief explanation is if the interest rate increases the inflation rate it becomes decreases, and if the interest rate decreases the inflation it will become increase.

Now, will explain more about the relationship between the interest rate and inflation

Body:

The relationship between inflation and interest rate

Inflation and interest rates are mostly related to each other, and this relationship is often referred to in macroeconomics and this relationship constitutes one of the basic principles of contemporary monetary policy, as central banks manipulate short-term interest rates to influence the rate of inflation in the economy.

The relationship between interest rates and inflation is inverse. The consumer price index refers to the consumer price index, which is a measurement that tracks changes in prices. Changes in the consumer price index are used to determine periods of inflation and deflation.

Causes of inflation

National debt , due to the fact governments haven't any preference however to elevate taxes, or print extra cash, to repay the country wide debt. When taxes are increased, corporations might be pressured to elevate their prices, to make amends for the tax fee imposed on them, and accordingly inflation occurs , In the second one case of cash printing, the cash deliver will increase, and accordingly inflation will occur.

The foreign exchange charge impacts inflation greatly, because the cost of the neighborhood forex is much lessthan the cost of overseas currencies, the expenses of imported items and products might be very high, and costly for purchasers withinside the country.

When firms are less productive, the supply of goods decreases and prices increase.

When the authorities imposes greater taxes inclusive of value-delivered tax or customs duties, it's going to result in better prices.

Causes of interest rate

foreign exchange market activity - The foreign investor's demand for debt securities affects the interest rate. Higher inflows of foreign capital increase the domestic money supply, which in turn leads to higher liquidity and lower interest rates.

Different variable ownership situations have different regulations and requirements that lead to the volatility of business costs. These costs are often passed on to the consumer in the form of an interest rate to lenders.

Budgetary deficit and expanded borrowing software of the Government result in an boom in hobby costs because the call for for price range increases. With the boom in hobby costs, prices move up and this could bring about inflation.

Inflationary risk is the danger that inflation will undermine an investment's returns thru a decline in buying power. Bond bills are maximum at inflationary danger due to the fact their payouts are typically primarily based totally on constant hobby rates, which means an boom in inflation diminishes their buying power.

Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. How much interest rate risk a bond has depends on how sensitive its price is to interest rate changes in the market. The sensitivity depends on two things, the bonds time to maturity, and the coupon rate of the bond.

Examples of hyperinflationary countries:

In recent years, the world has witnessed high rates of inflation due to the decline in economic conditions and the increase in political conflicts in many countries, especially developing ones, including Africa, Asia and Latin America. At the end of 2018, according to recent statistics, a group of countries topped the list of the six countries that suffer from high inflation, namely Sudan, Iran, North Korea, Venezuela and Argentina. For instance, the reason for inflation in Sudan, and specifically the south of Sudan which got separated from its north due to the scarcity of its resources and also lacks a strong primary structure, then the south of Sudan which wasnt able to attract investors to it. Then comes Iran, which suffers from a difficult economic situation due to the severe economic sanctions imposed by the United States on Iran, despite having economic resources that makes it a strong country. As for the inflation rate in Venezuela, it was extremely big, about 80,000 percent, and it all happened because of years of socialism, inefficiencyand corruption. Its currency has become unreliableand this led to Venezuela recording the highest inflation rate in the world. On the other hand, North Korea suffers from inflation of 55 percent due to its repressive regime that placed it in great isolation from the rest of the world and this situation affected its economic situation, and led to weak trade exchange between it and between other countries As for Argentina, its inflation rate reached 48%, due to debts and interest on loans that it accumulated for the benefit of the International Monetary Fund. One of the most prominent Arab countries suffering from severe inflation is Lebanon, where it recorded a rise in the inflation rate by 178 percent during the period December 2020 to November 2021 and is still continuing its rise until now all due to internal political differences that exhausted the economy and caused a sharp rise in prices Effects of inflation on the individual and society: Since the strength of the currency in light of inflation is weak, this leads to a decrease in the level of the real value of the income of individuals as a result of a decline in the currency, and this leads to an increase in the cost of production elements, which leads to a rise in prices, this includes a wide range of basic goods and services that individuals need such as food, medicine, and all of this affects the purchasing power of the people. At the beginning of inflation, and when people predict that the coming days will be worse, many of them would buy goods in quantities that can be stored for the coming periods. When the inflation crisis increases, this is when the real economic depression starts and people wouldnt be able to buy goods, andwould only limit themselves to the necessities of living. This economic depression also causes sellers to close their shops, which leads to high unemployment rates in society, and causes inflation to affect all areas of life. From an educational point of view, many may be reluctant to continue basic education in private schools, as well as avoid joining prestigious and expensive universities. In terms of health, inflation also affects receiving good and advanced treatment in private hospitals, or buy the right medicines at an expensive price as this is only for a limited number of people who are the wealthy. Inflation also affects the tourism sector of countries that depend on tourism, as the number of tourists decreases due to high prices and the choice of less expensive tourist countries. The increase in the rate of inflation leads to an exacerbation of the gap between poor and middle families on one hand, and rich families who are getting richer on the other.

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