How Do Interest Rates Influence Inflation?

How do interest rates influence the rate of inflation Inflation is a sustained increase in the general price level (and a fall in the real purchasing power of money). The rate of inflation is normally measured by a consumer price index, such as the Retail Price Index in the UK (which measures the annualised rate of change in prices over the preceding year). The Monetary Policy Committee of the Bank of England meets each month …

…policies then complement one another and drastic fiscal measures are not needed. In addition, during periods of economic growth and inflationary pressures, tax revenues automatically increase (through increases in employment) and government spending is reduced (due to fewer transfer payments). Fiscal policy, therefore, automatically helps to reduce inflation. Despite this, however, the automatic stabiliser on its own is not enough to keep inflation at bay and monetary policy remains central to the control of inflation.