How are inflation and interest rates linked?
When interest rates are low people and businesses can borrow money cheaply, so they do so, and of course spend it on “stuff”. This creates more demand for “stuff”, so prices tend go up more (higher inflation). As a knock on effect, businesses may expand to produce more “stuff” to meet demand, and so hire more people. This creates more people with jobs and thus money to spend, which creates more demand for “stuff” to buy, and further fuels inflation. When interest rates are high it is expensive for people and businesses to borrow money, so they don’t. So they have less money to spend, so they buy less “stuff”. This reduces demand, so prices tend not to go up so much (less inflation, or even deflation). As a knock on effect, businesses may cut back on producing “stuff”, and may even lay off some staff. This results in fewer people with jobs and money to spend, which also reduces demand for “stuff”, and further reduces inflation.
When rates are low more people are able to buy more products. When this happens the situation can occur where there are more buyers than products, so sellers can raise prices and still sell all they have. Like when the economy is good more people can pay high prices for gasoline. When the economy is slow less people can afford to buy gasoline so gasoline sellers lower prices to sell more of their gasoline. Lower interest lowers the costs of many sellers so they can afford to sell their stuff at lower prices.
