Why Do Inflation and Interest Rates Fight Like Old Rivals?

Imagine you have a piggy bank, and every year it gets heavier, that's inflation. Now imagine someone says, 'You can borrow more money from me, but I want more back later.' That’s like an interest rate. When inflation goes up, sometimes banks say, 'We need to charge you more,' which means the interest rates go up too. But if interest rates are high, people might not borrow or spend as much, and that can slow down inflation.

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Examples

When your favorite candy bar costs $1 more next year because of inflation, and the bank says you have to pay back $10 extra on your loan.
Your mom buys groceries for a week with $20 that used to last two weeks, that’s inflation. The bank now charges 7% interest instead of 5%, that’s interest rates going up.
The government raises the price of gas, which makes everyone take out more loans, but those loans are now pricier than before.

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Categories: Economics · inflation· interest rates· economics basics· monetary policy· finance