Understanding why the Fed will raise interest rates to fight higher prices

The Fed is expected to raise interest rates for the first time in almost four years, hoping to get control of the highest inflation in decades. It may seem a contradiction, when everything's expensive, to make it more expensive to borrow money to pay for things. That's exactly how this problem is supposed to be fixed.

The challenge of high prices is on full display at Pizaro's Pizza in the Montrose neighborhood. While there's a healthy appetite for the signature wood-fired and Detroit-style pizzas, the classic taste comes at a price. 

RELATED: Steps you can take to cut expenses during high inflation rates

As the government reports wholesale inflation sits at 10%, year-to-year, and that means the price for all of Pizaro's ingredients have gone up. Sometimes, by a lot. 

"You're talking about $6-7-8 dollars for pepperoni for a couple ounces as a topping," says Pizaro's owner Nicole Bean, "It's, like, 'ouch', it really hurts but, at the same time, you can't get rid of pepperoni."

RELATED: How Houston shoppers are saving money during inflation

Financial strategist Lance Roberts says the inflation problem is the result of the government pumping $5 trillion in COVID-relief money into the economy. With all that money to spend, and producers slowed by the pandemic, supply-and-demand pressured left prices nowhere to go but up. Now, the Fed has little choice, to help slow things down. 

"The reason you hike interest rates is to make things more costly for you, so you won't buy as much, which slows economic growth, which leads to 'deflationary pressures' that lower the rate of inflation," explains Roberts.

Those pressures could take some time. Financial observers are expecting three to as many as seven rate hikes in the coming year. Each will take months to trickle through the economy before prices respond. 

Meantime, businesses, like Pizaro's, are left trying to manage existing costs. 

"We're not getting rich off of inflation," says Pizaro's Nicole Bean. "We're just trying to make ends meet, and maintain our business."