Why Do Inflation and Interest Rates Constantly Play Hide and Seek?

Imagine you have a piggy bank with your allowance. If prices of candy go up, you need more money to buy the same amount, that’s like inflation. Now imagine your parents say you can only get extra allowance if you save some of it, that’s like interest rates. When inflation is high, they might raise interest rates so people save more and spend less.

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Examples

Your allowance increases from $10 to $12, but candy prices rise too, so you still need more money to buy the same amount.
When your parents increase the interest on your piggy bank savings, you decide to save more and spend less.
Inflation goes up, and your parents charge you extra for borrowing their money.

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Categories: Economics · inflation,interest rates,central bank policy,economic cycles,monetary policy