Why Do Inflation and Interest Rates Constantly Fight?

Imagine you're playing a game where one person tries to make everything more expensive (that's inflation), and the other tries to stop it by making loans cost more (that's interest rates). The person who makes loans cost more is usually your bank or government, they use interest rates like a tool to slow things down. If inflation gets too high, people start spending money faster, which can cause problems in the economy.

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Examples

  1. A hot dog that used to cost $2 now costs $3, and the bank says you have to pay more when you borrow money.
  2. Your mom raises the price of your favorite pizza from $10 to $12, and the bank increases your loan rate for buying a car.
  3. You see signs on stores saying 'Prices are up' while your credit card bill is getting bigger each month.

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Categories: Economics · inflation· interest rates· central banks· economic cycles