How inflation affects interest rates

Inflation rates are an important factor that defines what you pay for goods and services. Over time, the cost of products and services changes to fit current inflation rates.

Due to negative media, many people have a bad view of inflation rates and automatically see them as a bad thing. However, they don’t always work against you.

Usually the cost of inflation is matched by an increase in wages. Of course, this isn’t always the case but it’s typically how it’s supposed to work. The question is how does inflation affect interest rates?
The relationship between interest rates and inflation
When inflation rates change, you’ll often notice that so too do interest rates. This is basically a safety measure to ensure the economy is able to grow without risk from overspending.

When interest rates are low, more people are able to borrow, which means they spend more. This causes the economy to grow and inflation rates to increase. Once the rates go up, fewer people are able to borrow and less money will be spent.

So why, if the economy is growing, does this interest rate go up? Surely it would make more sense for the economy to keep getting stronger?

The trouble is, if the economy grows too quickly, it can lead to hyperinflation. This basically means that the amount of spending starts to outgrow the supply of products.

This can cause serious problems, which is why the inflation rates need to be changed. It’s all about gaining a balance that will work in the economy’s favour. Inflation rates are constantly changing so it’s always worth keeping up with them.
Inflation and credit
The inflation rates will have a direct effect on credit card applications and mortgage applications. The higher the interest rates, the less affordable credit cards become.

If you’re looking to apply for a credit card, it’s worth looking into the current inflation rates and to see whether they are due to come down anytime soon. If they are, it’s worth hanging on until they do decrease before you make your application.

If you’re a business, it’s also worth ensuring you’re up to date with inflation and interest rates. Just like you ensure you have adequate credit card processing for small businesses in the UK, you should make sure you’re up to date with the latest economic changes.

Inflation rates do play a big part in annual interest rates as they are somewhat interlinked and work together to ensure a stable economy.

Sources:

http://money.howstuffworks.com/interest-rate4.htm

http://www.investopedia.com/ask/answers/12/inflation-interest-rate-relationship.asp