Interest rates and Inflation

When interest rates, the interest paid on a loan, are low the economy grows, as people are usually borrowing money, buying houses and feeling comfortable about spending. So there is more money flowing in the economy. This is good but it can make prices go up as there is more demand. This can cause inflation.

When interest rates are higher, people usually buy less and start saving more, the economy slows down and inflation drops.

The job of the Federal Reserve is make sure interest rates are just right so as to keep inflation steady.