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
   2026-01-01: 2.38643124 Percent
with:
   US Fed Discount Rate
   US: DISC
   2026-01-01: 3.75000000 Percent

           US Inflation Rate   US Fed Discount Rat
                CPIY  Growth%        DISC  Growth%
           ---------- -------   ---------- -------
2026-01-01       2.39  100.00         3.75  100.00
2025-12-11       2.68  112.18         3.75  100.00
2025-12-01       2.68  112.18         4.00  106.67
2025-11-01       2.74  114.61         4.00  106.67
2025-10-30       3.01  126.24         4.00  106.67
2025-09-18       3.01  126.24         4.25  113.33
2025-09-01       3.01  126.24         4.50  120.00
2025-08-01       2.92  122.20         4.50  120.00
2025-07-01       2.70  113.35         4.50  120.00
2025-06-01       2.67  111.85         4.50  120.00
2025-05-01       2.35   98.68         4.50  120.00
2025-04-01       2.31   96.85         4.50  120.00
2025-03-01       2.39  100.18         4.50  120.00
2025-02-01       2.82  118.23         4.50  120.00
2025-01-01       3.00  125.73         4.50  120.00
2024-01-01       3.09  129.52         5.50  146.67
2023-01-01       6.41  268.61         4.50  120.00
2022-01-01       7.48  313.43         0.25    6.67
2021-01-01       1.40   58.66         0.25    6.67
2020-01-01       2.49  104.20         2.25   60.00
2019-01-01       1.55   65.00         3.00   80.00
2018-01-01       2.07   86.76         2.00   53.33
2017-01-01       2.50  104.76         1.25   33.33
2016-01-01       1.37   57.54         1.00   26.67
2015-01-01      -0.09   -3.74         0.75   20.00
2014-01-01       1.58   66.16         0.75   20.00
2013-01-01       1.59   66.83         0.75   20.00
2012-01-01       2.93  122.58         0.75   20.00
2011-01-01       1.63   68.38         0.75   20.00
2010-01-01       2.63  110.03         0.50   13.33
2009-01-01       0.03    1.25         0.50   13.33
2008-01-01       4.28  179.36         4.75  126.67
2007-01-01       2.08   86.98         6.25  166.67
2006-01-01       3.99  167.00         5.25  140.00
2005-01-01       2.97  124.44         3.25   86.67
2004-01-01       1.93   80.72         2.00   53.33
2003-01-01       2.60  108.84                     
2002-01-01       1.14   47.86                     
2001-01-01       3.73  156.39                     
2000-01-01       2.74  114.77                     
1999-01-01       1.67   70.01                     
1998-01-01       1.57   65.84                     
1997-01-01       3.04  127.56                     
1996-01-01       2.73  114.31                     
1995-01-01       2.80  117.51                     
1994-01-01       2.52  105.79                     
1993-01-01       3.26  136.54                     
1992-01-01       2.60  108.96                     
1991-01-01       5.65  236.82                     
1990-01-01       5.20  218.00                     
1989-01-01       4.67  195.57                     
1988-01-01       4.05  169.57                     
1987-01-01       1.46   61.17                     
1986-01-01       3.89  162.85                     
1985-01-01       3.53  148.04                     
1984-01-01       4.19  175.67                     
1983-01-01       3.71  155.53                     
1982-01-01       8.39  351.60                     
1981-01-01      11.83  495.52                     
1980-01-01      13.91  582.85                     
1979-01-01       9.28  388.87                     
1978-01-01       6.84  286.52                     
1977-01-01       5.22  218.56                     
1976-01-01       6.72  281.50                     
1914-01-01       2.04   85.52                     

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