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
   2025-09-18: 2.91617428 Percent
with:
   US Fed Discount Rate
   US: DISC
   2025-09-18: 4.25000000 Percent

           US Inflation Rate   US Fed Discount Rat
                CPIY  Growth%        DISC  Growth%
           ---------- -------   ---------- -------
2025-09-18       2.92  100.00         4.25  100.00
2025-08-01       2.92  100.00         4.50  105.88
2025-07-01       2.70   92.76         4.50  105.88
2025-06-01       2.67   91.53         4.50  105.88
2025-05-01       2.35   80.75         4.50  105.88
2025-04-01       2.31   79.26         4.50  105.88
2025-03-01       2.39   81.98         4.50  105.88
2025-02-01       2.82   96.76         4.50  105.88
2025-01-01       3.00  102.89         4.50  105.88
2024-12-19       2.89   99.04         4.50  105.88
2024-12-01       2.89   99.04         4.75  111.76
2024-11-08       2.75   94.28         4.75  111.76
2024-11-01       2.75   94.28         5.00  117.65
2024-09-18       2.44   83.69         5.50  129.41
2023-09-18       3.70  126.87         5.50  129.41
2022-09-18       8.20  281.25         2.50   58.82
2021-09-18       5.39  184.84         0.25    5.88
2020-09-18       1.37   47.02         0.25    5.88
2019-09-18       1.71   58.68         2.75   64.71
2018-09-18       2.28   78.08         2.50   58.82
2017-09-18       2.23   76.57         1.75   41.18
2016-09-18       1.46   50.20         1.00   23.53
2015-09-18      -0.04   -1.24         0.75   17.65
2014-09-18       1.66   56.85         0.75   17.65
2013-09-18       1.18   40.63         0.75   17.65
2012-09-18       1.99   68.28         0.75   17.65
2011-09-18       3.87  132.65         0.75   17.65
2010-09-18       1.14   39.22         0.75   17.65
2009-09-18      -1.29  -44.11         0.50   11.76
2008-09-18       4.94  169.29         2.25   52.94
2007-09-18       2.76   94.47         5.25  123.53
2006-09-18       2.06   70.72         6.25  147.06
2005-09-18       4.69  160.71         4.50  105.88
2004-09-18       2.54   87.02         2.50   58.82
2003-09-18       2.32   79.57         2.00   47.06
2002-09-18       1.51   51.93                     
2001-09-18       2.65   90.81                     
2000-09-18       3.45  118.46                     
1999-09-18       2.63   90.13                     
1998-09-18       1.49   51.05                     
1997-09-18       2.15   73.89                     
1996-09-18       3.00  102.96                     
1995-09-18       2.54   87.22                     
1994-09-18       2.96  101.62                     
1993-09-18       2.69   92.22                     
1992-09-18       2.99  102.47                     
1991-09-18       3.39  116.29                     
1990-09-18       6.16  211.24                     
1989-09-18       4.34  148.84                     
1988-09-18       4.17  143.13                     
1987-09-18       4.36  149.36                     
1986-09-18       1.75   60.16                     
1985-09-18       3.14  107.77                     
1984-09-18       4.27  146.43                     
1983-09-18       2.86   98.08                     
1982-09-18       5.04  172.93                     
1981-09-18      10.95  375.57                     
1980-09-18      12.60  432.09                     
1979-09-18      12.18  417.69                     
1978-09-18       8.31  284.83                     
1977-09-18       6.60  226.23                     
1976-09-18       5.49  188.41                     
1975-09-18       7.91  271.08                     
1914-01-01       2.04   69.98                     

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