Why do central banks raise the interest rates to fight inflation?

In United States, the Federal Reserve is raising interest rates to fight inflation. In Europe, the European Central Bank (ECB) and its Governing Council decided to raise the key ECB interest rates too. Why these policies are important? What do they try to fix?

    The main reasoning behind such monetary policies is that by implementing a raise in the cost of borrowing money, prices will drop. The chain reaction on higher interest rates can be explained by the fact that businesses and households will feel the difficulty of borrowing more money to buy goods and services, which should translate into slower wage growth, and eventually less spending, and lower prices for the market.

   Therefore, making the opportunity to borrow cheap money less available, it means that individuals as consumers and businesses as resources buyers will try to find a new balance point, by exploiting the money they already have, without expecting more income to cope with higher inflation. Individuals must adjust their lives accordingly.

   For instance, if workers demand an increase on their salary, they will push up the labor cost, which means that businesses will have a new challenge to deal with. Probably, they will move up the prices of their products and services, attempting to record more income, something that in the end will balance the salary increase.

   By making money more expensive to borrow, and at the same time risking recording a big decline in demand, markets will face instability for many more months. According to the ECB, the new staff projections foresee inflation to average 8.1% in 2022, 5.5% in 2023, and 2.3% in 2024.