What Is the Relationship Between Inflation and Interest Rates?

The Relationship Between Inflation and Interest Rates can be summarized as:

• Interest rates and inflation tend to move in the same direction, but with some delay.
• Central banks raise interest rates to cool the economy which decreases inflation, when inflation is high.
• Central banks lower interest rates to stimulate the economy which increases inflation, when inflation is low.

The history of US inflation rates and US Fed discount rates is provided below:

Compare:
   US Inflation Rate
   US: CPIY
   2025-10-30: 3.01267678 Percent
with:
   US Fed Discount Rate
   US: DISC
   2025-10-30: 4.00000000 Percent

           US Inflation Rate   US Fed Discount Rat
                CPIY  Growth%        DISC  Growth%
           ---------- -------   ---------- -------
2025-10-30       3.01  100.00         4.00  100.00
2025-09-18       3.01  100.00         4.25  106.25
2025-09-01       3.01  100.00         4.50  112.50
2025-08-01       2.92   96.80         4.50  112.50
2025-07-01       2.70   89.78         4.50  112.50
2025-06-01       2.67   88.60         4.50  112.50
2025-05-01       2.35   78.17         4.50  112.50
2025-04-01       2.31   76.72         4.50  112.50
2025-03-01       2.39   79.36         4.50  112.50
2025-02-01       2.82   93.66         4.50  112.50
2025-01-01       3.00   99.60         4.50  112.50
2024-12-19       2.89   95.86         4.50  112.50
2024-12-01       2.89   95.86         4.75  118.75
2024-10-30       2.60   86.23         5.00  125.00
2023-10-30       3.24  107.58         5.50  137.50
2022-10-30       7.75  257.09         3.25   81.25
2021-10-30       6.22  206.52         0.25    6.25
2020-10-30       1.18   39.24         0.25    6.25
2019-10-30       1.76   58.55         2.50   62.50
2018-10-30       2.52   83.73         2.75   68.75
2017-10-30       2.04   67.75         1.75   43.75
2016-10-30       1.64   54.30         1.00   25.00
2015-10-30       0.17    5.66         0.75   18.75
2014-10-30       1.66   55.24         0.75   18.75
2013-10-30       0.96   31.99         0.75   18.75
2012-10-30       2.16   71.77         0.75   18.75
2011-10-30       3.53  117.01         0.75   18.75
2010-10-30       1.17   38.91         0.75   18.75
2009-10-30      -0.18   -6.07         0.50   12.50
2008-10-30       3.66  121.33         1.25   31.25
2007-10-30       3.54  117.38         5.25  131.25
2006-10-30       1.31   43.32         6.25  156.25
2005-10-30       4.35  144.32         4.75  118.75
2004-10-30       3.19  105.86         2.75   68.75
2003-10-30       2.04   67.74         2.00   50.00
2002-10-30       2.03   67.25                     
2001-10-30       2.13   70.58                     
2000-10-30       3.45  114.46                     
1999-10-30       2.56   85.01                     
1998-10-30       1.49   49.30                     
1997-10-30       2.08   69.20                     
1996-10-30       2.99   99.34                     
1995-10-30       2.81   93.25                     
1994-10-30       2.61   86.57                     
1993-10-30       2.75   91.29                     
1992-10-30       3.20  106.30                     
1991-10-30       2.92   96.97                     
1990-10-30       6.29  208.78                     
1989-10-30       4.49  149.12                     
1988-10-30       4.25  141.06                     
1987-10-30       4.53  150.47                     
1986-10-30       1.47   48.86                     
1985-10-30       3.23  107.18                     
1984-10-30       4.26  141.32                     
1983-10-30       2.85   94.64                     
1982-10-30       5.14  170.59                     
1981-10-30      10.14  336.63                     
1980-10-30      12.77  423.74                     
1979-10-30      12.07  400.69                     
1978-10-30       8.93  296.37                     
1977-10-30       6.39  212.11                     
1976-10-30       5.46  181.38                     
1975-10-30       7.44  246.84                     
1914-01-01       2.04   67.74                     

As you can see, when US inflation rate went up above 8% in 2022, US Fed raised the Discount Rate from 0.25% to 5.50% in about 1 year. This helped to bring the inflation rate down to 3% in 2023.

⇒ Relation of GDP and Interest Rates

⇐ Fisher Equation on Interest Rates and Inflation

⇑ Interest Rates and Stock Market

⇑⇑ Interest Rates