Central banks are really important for keeping inflation under control. Let’s break down how they do it in a simple way.

1. Interest Rates:

• Raising Rates: When prices are going up a lot (inflation), central banks often raise interest rates. This means it costs more to borrow money. Because of this, people tend to spend less, and businesses invest less too.
• Lowering Rates: On the other hand, if prices are too low, they might lower interest rates. This makes borrowing cheaper and encourages people and businesses to spend more, which helps the economy grow.

2. Open Market Operations:

• Central banks can buy or sell government bonds. When they sell bonds, it takes money out of the economy, making it tighter. When they buy bonds, it puts more money into the economy, making it easier to borrow and spend.

3. Reserve Requirements:

• Banks have to keep a certain amount of money in reserve, which means they can't loan everything out. Changing how much they have to keep affects how much money they can lend. This can also affect inflation in a roundabout way.

4. Inflation Targeting:

• Many central banks aim for a specific inflation rate, like 2%. They try to adjust their plans to keep inflation near this number. This helps keep prices stable and predictable.

In short, central banks use these tools to manage inflation and keep the economy healthy!