Interest Rate is used to control Inflation by the central banks. Inflation is the continued increase in the general price levels of an economy. On the other hand; interest is the cost of borrowing funds. This article will make you understand the relationship between inflation and interest rates. And in effect interest rates incorporate a “negative feedback loop” into inflation. When people think of the word inflation they generally think of how inflation affects them. They see rising prices of common commodities like gasoline or food and worry about the rising cost of living.