How do interest rates influence the rate of inflation

Inflation is a sustained increase in the general price level (and a fall in the real purchasing power of money). The rate of inflation is normally measured by a consumer price index, such as the Retail Price Index in the UK (which measures the annualised rate of change in prices over the preceding year). The Monetary Policy Committee of the Bank of England meets each month to set the official base rate of interest for …

…able to co-exist in the economy. Monetary policy is therefore an important tool in controlling inflation. Other policies are also used, however, such as fiscal policy and supply side policies, but these on their own are usually problematic, often giving rise to policy conflicts. Supply side policies are important ongoing measures which help to reduce the price level, particularly through controlling cost-push inflation. Monetary policy, however, is currently the main method of controlling demand-pull inflation.