Inflation and Interest Rates

Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. When inflation is high, each dollar buys less than before. Central banks, like the Federal Reserve, manage inflation through interest rates, which are the costs of borrowing money. When inflation is high, central banks may raise interest rates to cool the economy, making loans more expensive and encouraging saving. Conversely, lowering interest rates can stimulate spending and investment, helping to combat low inflation or economic stagnation. Both inflation and interest rates are key tools for managing economic stability.