Do higher interest rates contribute to more inflation?

Question

With so many corporations, entrepreneurs, and mom-and-pop businesses relying on borrowed money to finance their operations, wouldn't it follow that they will, at some point, raise their prices if it would cost them more to stay in business due to higher debt expenses?

Answer 1

If higher interest rates contribute to inflation then the Federal Reserve so have it wrong!!

Most inflation is believed to come from an over active economy with too much money chasing too few goods. By raising the cost of borrowing money, it reduces the amount of money people have to spend on more stuff. That slows down the economy.

Most businesses don't rely on borrowed money to stay in business. They typically used borrowed money to expand their business or acquire other businesses.

Answer 2

It actually does the opposite. Higher interest rates have the greater affect of corporations and others borrowing less in total pumping less money into the economy. Also, higher interest rates typically force people/businesses to hold their money in bank accounts that are earning more interest than normal instead of investing it. This is the challenge the Fed faces, controlling inflation without slowing the economy too much.

You make a good point about passing on the cost to the consumer but it doesn't always work like that. Think about mortgage rates. If they go up, and your trying to sell your home, you'll actually lower your asking price b/c of the increased cost to potential buyers.

Answer 3

Actually higher interest rates is a force for lower inflation.

The concept is as follows
You're on an island with 100 people and there's $1,000 dollars floating around in circulation. Nobody can borrow money. A ride on the Farris wheel costs a dollar.

Some wise guy decides he will start lending money to folks. That effectively "increases" the perceived money supply in the economy from $1,000 to $1,500. The Farris wheel now costs $1.50.

The wiser guy LOWERS the interest rates....effectively the economy now has $2,000, everyone's has money in their pocket, the Farris wheel now cost $2.00.

Lower interest rates has a tendencey to increase prices (inflation) while higher interest rates does the opposite.

Answer 4

Quite the opposite. The Federal Reserve raises the interest rate when they feel inflation is creeping in. When the interest rate goes up, inflation and the stock market goes down.

Answer 5

Most business loans are not adjustable so your logic doesn't follow. When there are inflationary fears, rates are raised to slow the economy. Less people get INTO business and less people buy houses and new cars and such, so the economy slows.

Answer 6

I didn't see a whole lot of price cutting while interest rates were dropping...