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
   2025-12-11: 2.67708053 Percent
with:
   US Fed Discount Rate
   US: DISC
   2025-12-11: 3.75000000 Percent

           US Inflation Rate   US Fed Discount Rat
                CPIY  Growth%        DISC  Growth%
           ---------- -------   ---------- -------
2025-12-11       2.68  100.00         3.75  100.00
2025-12-01       2.68  100.00         4.00  106.67
2025-11-01       2.74  102.17         4.00  106.67
2025-10-30       3.01  112.54         4.00  106.67
2025-09-18       3.01  112.54         4.25  113.33
2025-09-01       3.01  112.54         4.50  120.00
2025-08-01       2.92  108.93         4.50  120.00
2025-07-01       2.70  101.04         4.50  120.00
2025-06-01       2.67   99.71         4.50  120.00
2025-05-01       2.35   87.97         4.50  120.00
2025-04-01       2.31   86.34         4.50  120.00
2025-03-01       2.39   89.30         4.50  120.00
2025-02-01       2.82  105.40         4.50  120.00
2024-12-11       2.89  107.88         4.75  126.67
2023-12-11       3.35  125.22         5.50  146.67
2022-12-11       6.45  241.10         4.00  106.67
2021-12-11       7.04  262.84         0.25    6.67
2020-12-11       1.36   50.88         0.25    6.67
2019-12-11       2.29   85.36         2.25   60.00
2018-12-11       1.91   71.35         2.75   73.33
2017-12-11       2.11   78.78         1.75   46.67
2016-12-11       2.07   77.50         1.00   26.67
2015-12-11       0.73   27.25         0.75   20.00
2014-12-11       0.76   28.26         0.75   20.00
2013-12-11       1.50   56.10         0.75   20.00
2012-12-11       1.74   65.03         0.75   20.00
2011-12-11       2.96  110.66         0.75   20.00
2010-12-11       1.50   55.87         0.75   20.00
2009-12-11       2.72  101.65         0.50   13.33
2008-12-11       0.09    3.41         1.25   33.33
2007-12-11       4.08  152.45         4.75  126.67
2006-12-11       2.54   94.90         6.25  166.67
2005-12-11       3.42  127.59         5.00  133.33
2004-12-11       3.26  121.61         3.00   80.00
2003-12-11       1.88   70.21         2.00   53.33
2002-12-11       2.38   88.79                     
2001-12-11       1.55   57.96                     
2000-12-11       3.39  126.51                     
1999-12-11       2.68  100.28                     
1998-12-11       1.61   60.21                     
1997-12-11       1.70   63.59                     
1996-12-11       3.32  124.11                     
1995-12-11       2.54   94.82                     
1994-12-11       2.67   99.92                     
1993-12-11       2.75  102.66                     
1992-12-11       2.90  108.35                     
1991-12-11       3.06  114.46                     
1990-12-11       6.11  228.09                     
1989-12-11       4.65  173.60                     
1988-12-11       4.42  165.08                     
1987-12-11       4.43  165.64                     
1986-12-11       1.10   41.01                     
1985-12-11       3.80  141.90                     
1984-12-11       3.95  147.50                     
1983-12-11       3.79  141.61                     
1982-12-11       3.83  143.06                     
1981-12-11       8.92  333.29                     
1980-12-11      12.52  467.54                     
1979-12-11      13.29  496.58                     
1978-12-11       9.02  336.85                     
1977-12-11       6.70  250.31                     
1976-12-11       4.86  181.72                     
1975-12-11       6.94  259.10                     
1914-01-01       2.04   76.23                     

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