Consumption Vs. High Interest Rates
Growth and inflation are two components of economics that are historically linked by interest rates, which describe the costs of money and influence consumer behavior. Of course, high consumption rates are preferred to fuel the economy.
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Identification
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High interest rates reduce overall consumption levels because high interest rates make loans and credit more expensive for consumers.
Features
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The Federal Reserve Board is responsible for balancing growth against inflation. The Fed uses higher interest rates through monetary policy to slow down the economy. Rapid growth is associated with inflation because high demand for goods pushes prices higher.
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Considerations
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High interest rates may not affect purchase patterns for consumer staples and vices, which include pharmaceuticals, food, alcohol and tobacco. However, real estate, big-ticket items (durable goods) and luxury goods often experience sales declines during periods of high interest rates.
Misconceptions
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Economic growth does not always foreshadow inflation and higher interest rates. The mid 1980s and 1990s were associated with strong economies, low interest rates and low inflation.
Risks
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High interest rates may trigger recessions because of low consumption levels, which can lead to surging job losses and weakened investor markets.
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References
Resources
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