1. Inflation: Introduction
  2. Inflation: What Is Inflation?
  3. Inflation: How Is It Measured?
  4. Inflation: Inflation And Interest Rates
  5. Inflation: Inflation And Investments
  6. Inflation: Conclusion

Whenever you hear the latest inflation update on the news, chances are that interest rates are mentioned in the same breath.

In the United States, interest rates are decided by the Federal Reserve. The Fed meets eight times a year to set short-term interest rate targets. During these meetings, the CPI and PPIs are significant factors in the Fed's decision.

Interest rates directly affect the credit market (loans) because higher interest rates make borrowing more costly. By changing interest rates, the Fed tries to achieve maximum employment, stable prices and a good level growth. As interest rates drop, consumer spending increases, and this in turn stimulates economic growth. (To learn how trade currencies using these economic reports, read Forex Walkthrough: The Fed.)

Contrary to popular belief, excessive economic growth can in fact be very detrimental. At one extreme, an economy that is growing too fast can experience hyperinflation, resulting in the problems we mentioned earlier. At the other extreme, an economy with no inflation has essentially stagnated. The right level of economic growth, and thus inflation, is somewhere in the middle. It's the Fed's job to maintain that delicate balance. A tightening, or rate increase, attempts to head off future inflation. An easing, or rate decrease, aims to spur on economic growth.

Keep in mind that while inflation is a major issue, it is not the only factor informing the Fed's decisions on interest rates. For example, the Fed might ease interest rates during a financial crisis to provide liquidity (flexibility to get out of investments) to U.S. financial markets, thus preventing a market meltdown.

Inflation: Inflation And Investments

Related Articles
  1. Financial Advisor

    How the Fed Fund Rate Hikes Affect the US Dollar

    Learn about the effects the federal funds rate on the U.S. dollar. Understand what happens when the Federal Reserve increases interest rates.
  2. Insights

    How Interest Rates Affect The U.S. Markets

    Interest rates can have both positive and negative effects on U.S. stocks, bonds and inflation.
  3. Insights

    Is 2016 The Year For An Interest Rate Hike?

    The debate ultimately centers on the strength of the economy.
  4. Trading

    How Interest Rate Cuts Affect Consumers

    Stock traders usually rejoice when the Federal Reserve cuts interest rates. But it’s not always best for everyone.
  5. Investing

    Forces Behind Interest Rates

    Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing.
  6. Trading

    Why Interest Rates Have Been Low for So Long

    Learn of several competing explanations about why the Federal Reserve has kept interest rates so low in the United States since 2008.
  7. Trading

    A Red Flag to the U.S. Equity Market: Rate Hikes

    Discover why the Federal Reserve may raise interest rates in 2016, why that might be necessary and why equity markets might not like it.
  8. Trading

    Why Interest Rates Affect Everyone

    Learn why interest rates are one of the most important economic variables and how every individual and business is affected by rate changes.
  9. Insights

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  10. Trading

    As Expected, The Fed Raised Interest Rates

    Almost a decade after it first began decreasing rates at the beginning of an economic slowdown, the Federal Reserve raised its benchmark rates to between 0.25 and 0.50 percentage points today.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center