There is an existing close relationship between interest rates and inflation. Theirs is an inverse relationship. When the interest rates are on the low, the economy thrives, and inflation goes up. Conversely, high interest rates result in slowed economy and a decreased inflation.¹
Key Issues in the Inflation and Interest Rates Relationship
What Is Inflation?
Inflation is described as the rate at which the prices of goods or services increase. Increased prices result in a lowered purchasing power of a currency. This raises the cost of living and high interest rates. The economy functions smoothly when the inflation rate falls within permissible limits.
What Are Interest Rates?
On the other hand, interest rates refer to the rate at which the lenders grant funds to borrowers. Interest rates impact the economy substantially as well as affecting forex, stock, and investments. When money becomes cheap, more people get motivated to get it. The value of money goes down, and inflation goes up.
Inflation affects your power to purchase goods or services, while interest rates affect your ability to borrow and repay the money. Both situations can lead to a personal financial crisis, especially when your income as a public employee remains essentially unchanged.²
Public Employees be Financially Safe in Time of Crisis
Public employees need to remain prepared financially and especially when a financial crisis strikes. This means that you protecting and managing your finances becomes a priority. Here are some areas of your finances you can evaluate to know how well prepared you are for such eventualities.
Your savings: Having an emergency fund is crucial and a necessity. Assess your current situation and see if you need to start saving or increase your saving amount. Either way, you need to make a positive change. The funds also need to be in a liquid savings account where you can easily access them in time of need and without or with low charges. Financial experts recommend having at least three months’ worth of expenses in your savings account. But you can make your limit as high as you want it to be.
A retirement plan: You need to consider how and when you want to retire and the goals you have in place for that to happen successfully. Keep in mind the aspect of inflation and if the amount you’ll have at retirement will be enough to support your financial needs without an income. With a good retirement plan, the rise or fall of inflation or interest rates won’t be as hard on you.
Navigating Inflation and Interest Rates
The relationship between the two can affect your finances, both in the money at hand and your ability to borrow. Interest rates are used to control inflation and money circulation because they control the prices of goods and services. High interest makes borrowing harder. With lesser people being able to borrow, the circulation of the money goes down. The inability to buy reduces the demand for goods and services whose supply remains the same. Ultimately, the prices go down, making inflation levels go down.
“About Mountain West Financial and the CalPATH Home Loan Program
Mountain West Financial is the exclusive lender offering CalPATH, the #1 home loan program for Teachers, Police Officers, Firefighters, and other public employees who serve our local California communities.
You may contact our CalPATH Hotline @ 800-310-7577, seven days a week from (8:30 am to 8:00 pm). A CalPATH advisor will be standing by to answer (any & all) questions you may have about the home buying or refinance process.
We look forward to working with you soon!
Links to External Sources:
- The return of the inflation specter https://www.ft.com/content/6cfb36ca-d3ce-4dd3-b70d-eecc332ba1df
- How rising inflation can affect your money (cnbc.com) https://www.cnbc.com/2021/06/16/what-the-heck-is-going-on-with-inflation-heres-what-you-need-to-know.html