Impacts Of Inflation
INFLATION AND INTEREST RATES: IMPACTS
Inflation and interest rates mainly run parallel to one another. Usually when interest rates are too low, the public is inclined to purchase too many assets, vehicles and household goods on credit, resulting in banks and moneylenders increasing the rates and this in turn BOOSTS inflation.
A change in the interest rate will tend to affect the price of financial assets such as bonds and shares, and the exchange rate. These changes in financial markets affect consumer and business demand and in turn output. Changes in demand and output then impact on the labour market - employment levels and wage costs - which in turn influence producer and consumer prices.
When interest rates are changed, demand can be affected in various ways:
It can affect spending and saving decisions. At higher interest rates, clients have less money to spend, due to the increased cost of borrowing. (Most people have loans, which they have to service every month, so if......
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