What Does The Inflation Rate Indicate?

Countrys' Interest Rate and Inflation Rate?

• Hi guys, As a rule of thumb: Interest Rate increases, Inflation Rate decreases. Interest Rate decreases, Inflation Rate increases. So if a country's Inflation Rate is -0.4%, ...show more

• Answer:

  First off, they are not one-to-one. So the numbers you're pulling here are arbitrary and wouldn't correlate so neatly. Secondly, that "rule of thumb" is a general principle. So is inflation. In this example, you are suggesting DEFLATION, which is incredibly rare. Since the Great Depression, the only nominal deflation was briefly around 2009. But this deflation was fake, since the Fed was printing up more currency -- any increase in the money supply will cause inflation. Also, the CPI is a flawed measure. Peter Schiff did a pretty funny experiment a while back calculating the actual changes in prices of various items vs. what the nominal inflation rate was. As such, the last time the US experienced real deflation was during the Great Depression. In the early 1930's, the inflation rate reached -4% (so 4% deflation) and the interest rate reached over 12%. But that was back when the US dollar still had some connection to gold. Since 1971, the dollar has been completely fiat and the Fed can just keep printing them up... which they do.