Interest and inflation: a complex relationship
Interest rates and inflation are tied together in a wide range of convoluted ways that get debated back and forth in financial circles constantly.
To deal with them all has been the work of many important papers in the financial world, and there really isn't space here, so we'll just cover the basics. It is important that you have a fundamental grasp of the basics, to make the best decisions for your money. Cashdoctors.com.au wants to give that outline to you, and you can go further to fill in any of the gaps particular to your situation that might help you sort out the issues.
To put it as clearly as possible, it may be best to think of the economy as a train. The engineer up front is like government, and they want to keep things moving ahead, but not so fast that things jump the tracks and a new Great Depression begins. Interest rates are their best throttle to the economy. By pushing down the rates, the economy opens up, because on cheap debt, people can buy more. When spending is verging on the runaway, they raise the rates, slowing the purchasing, and making saving a more appealing option.
Cash Doctors is slightly different in that a payday loan is such short-term debt, it is less affected by interest rates, and that helps it fit in better whatever the train is doing. Just log on to cashdoctors.com.au, and sign up for your Cash Doctors card. This will allow you to quickly and easily access your money, even if it isn't payday just yet.
Now you can see how interest affects the economy, but just how does it control inflation? It falls to the old law of supply and demand. Money is a commodity just as gold, beef, or oil. The more of it in circulation, the lower the demand. The lower the demand, the less it is worth. This is one of the reasons that prices rise. The money is easier to come by so the things that are less easy demand more of it. So by raising rates, it encourages people to spend less and save more, taking some of the money out of circulation.
This is one of the complications to the interest rate. When the rates go up, businesses have to pay more to finance their raw material and development; this cost is, of course, passed on to the consumer as higher prices. Which is the very thing that the interest rates were meant to stop. Now you can see some of the tricky balance in running the economy.
Hopefully, this has given a framework to understanding the complex relationship between interest and inflation, and will help you decide where to put your money, and when.
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