Interest Rates and Inflation - An Alternative Explanation

Never really got it? Here’s your chance…

Inflation and interest rates can be hard concepts to grasp and when economists explain what they are and how they influence each other, most people zone out.

If this applies to you, give this article a chance. Hopefully it’ll give you the gist of things, as we try to cover the basics from an alternative angle. Knowing how this stuff works will help you to make better decisions for your money.

To put it simply, think of the economy like a city bus. The driver is the government, and they want to keep the bus moving.

The interest rate acts like the throttle. By pushing down the throttle (interest rates down), the economic bus speeds up, and people buy more. When the engine starts to overheat and spending is getting out of control, the driver takes the foot of the pedal (raise the interest rates) and people slow down on spending.

So, if interest rates go down, spending goes up and when interest rates go up, spending goes down. With the bus model, we can start to see how interest rates affects the economy, but how does it affect inflation? If you think of inflation as a balloon that sits on the exhaust pipe of the economic bus, you’ll notice that when the bus speeds up there’s more exhaust and the balloon inflates, on the other hand, when the bus slows down the balloon deflates.

That’s how interest rates influences inflation. When the government takes the foot of the pedal (raise the interest rates) it is encouraging people to spend less and save more, the economy slows down and inflation goes down. Low inflation means that your money keeps its value.

For example, a bottle of milk could cost the same in 2008 as it did in 1998. In times with low inflation and high interest rates, it’s a good idea to put your money in a high interest savings account and take it easy on spending as things will be more expensive to buy.

When the economy starts to speed up again you’ll have mountains of cash ready to spend and the price will be lower. The payday loans offered by Payday Cash Loan are less affected by interest rates than other types of loans. We’re able to run alongside the bus at all times.

So if you need extra cash to spend on shopping in good times or lack a couple of hundred dollars for rent in slow periods visit our website. We always have fast cash available.

 

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