How do interest rates affect inflation?

How do interest rates affect inflation?

Interest rates influence inflation by affecting borrowing costs and consumer spending. When rates are low, borrowing is cheaper, which can increase spending and investment, potentially leading to higher inflation.

Can you explain how that works in more detail?

Sure! When interest rates are low, consumers and businesses are more likely to take loans. This increased spending boosts demand for goods and services, which can drive prices up, leading to inflation.

What happens if interest rates are high?

High interest rates make borrowing more expensive, which can reduce consumer spending and business investment. This decrease in demand can help lower inflation.

Are there any other factors that influence inflation?

Yes, other factors include supply chain disruptions, changes in consumer preferences, and government policies. All these can interact with interest rates to affect inflation.