When costs go up during inflation, it can have a huge impact on both interest rates and exchange rates. It also makes everything from grocery bills to new cars more expensive.
To combat inflation, central banks often adjust their target interest rates higher to cool things off. Higher rates attract foreign investors, which strengthens the dollar when exchanging currencies. That can affect how much it costs to send money.
Learn more about what causes exchange rates to fluctuate and the relationship between interest rates and inflation in our guide below.
Key Takeaways
- Interest rates and inflation tend to move in the same direction – when inflation is increasing, banks will increase interest rates to encourage people to spend less and save more.
- Understanding how inflation can affect interest rates can help you make better decisions about sending international money transfers.
- Increased inflation often reduces a currency’s buying power, which weakens it against other currencies.
- In a period of increasing inflation, exchange rates can be more volatile. This means that cross-border money transfers can become more costly.
- Western Union makes it easier to see how much your recipient will get when you send a cross-border payment.
What Is Inflation?
Inflation is the rate of increase in the cost of goods and services over time. It is usually measured as a percentage change compared to 12 months earlier. For example, in April 2026, prices were up 3.81% overall compared to April 2025, according to the US Bureau of Labor Statistics.
What Are Interest Rates?
Interest rates are the cost of borrowing money, or the yield you receive from lending it. The interest rate that you pay on money you borrow is managed by your lender, but is usually influenced by the prevailing bank base rate (or prime rate). If you are a saver or investor, the interest rate determines how much you receive from your bank as compensation for you storing your savings with them.
Interest rates form part of monetary policy, which governments and central banks use to control the overall money supply and promote economic growth. The federal funds rate, part of that monetary policy, has been set at 3.50%–3.75% since December 2025.
How Does Inflation Affect Interest Rates?
The relationship between inflation and interest rates is constantly aiming for balance. When inflation rises, central banks (like the Fed) raise their target interest rates to cool spending. Higher rates make it cost more to borrow, so people are less willing to spend, which slows down the economy and lowers inflation.
- Inflation rises → Fed raises rates → prices stabilize → inflation decreases
But if the economy cools off too much, people buy less, which means companies hire less, which means a lower employment rate. Then the Fed may cut interest rates to stimulate growth.
- Interest rates go up → spending slows down → employment slows down → Fed cuts rates
For example, in 2022, inflation in the US averaged 8% for the year, peaking at 9.1% in June, according to the BLS. To get it under control, the Fed started aggressively raising rates, bringing the target range from 0.75%–1% in May 2022 to 5.25%–5.5% in July 2023, where it remained for roughly a year.
As inflation cooled off (it was 4.1% in 2023 and 2.9% in 2024), the Fed slowly stepped the target range back down to 3.5%–3.75%, where it remains.
The Relationship Between Inflation and Interest Rates Over Time
Broadly, interest rates and inflation tend to move in the same direction. When inflation is increasing, banks will increase interest rates to encourage people to spend less and save more. In theory, this should reduce demand for goods and services, which helps to contain inflation.
When inflation is low, or around the target rate of 2%, banks can keep interest rates lower because there is less upward pressure on prices, so people can afford to spend more.
When you consider both factors over time, you can get a better idea of how inflation affects interest rates. Often, inflation rises first, and then interest rates quickly follow.
For example, in 2019, both inflation and the federal funds rate stayed roughly between 2% and 3%. Both dropped to near zero in 2020 after the pandemic struck the US. Then, inflation rose sharply throughout 2021 and 2022. Interest rates followed, though not immediately. And as inflation slowly dropped, eventually interest rates did, too — both remained relatively flat through 2026 after stabilizing.
How Does Inflation Affect Currency Exchange Rates?
Currency exchange is when you trade money from one currency to another. The value of one currency compared to another currency is written as a ratio called an exchange rate. For example, USD/INR 82.72 is an exchange rate that means a US dollar is worth 82.72 Indian rupees.
Currency exchange rates can fluctuate significantly and are affected by many different factors in the economy. When inflation goes up, money doesn’t go as far, and the currency’s buying power goes down. That makes it less attractive to foreign investors, pushing the currency’s value down compared to other currencies. That lowers the exchange rate when trading that currency for another.
You can calculate the exchange rate for a certain currency by using a currency converter. Learn more about different types of exchange rates to understand how different countries manage their exchange rates.
How Can Inflation Affect Cross-Border Money Transfers?
In a period of increasing inflation, exchange rates can be more volatile. This means that cross-border money transfers can become more costly. If you routinely send money abroad, perhaps the same number of dollars each month, you may start to see the impact of inflation on the amount of local currency that is received.
For example, say you sent $300 to Spain in April 2025, and the recipient received EUR 267.36. Over the next year, inflation goes up 3.81% in the US. When you send $300 in April 2026, the recipient receives just EUR 256.71. The dollar weakened against the euro during this time, so that one dollar could buy fewer euros than it did a year ago.
However, many factors other than inflation affect the strength of one currency compared to another. For example, despite rising US inflation, the value of the dollar went up compared to the Indian rupee over the same time period. That USD $300 could have been worth 25,681 INR in April 2025, but 28,019 INR in April 2026.
You can easily track and respond to exchange rate volatility when you use Western Union’s tools. For instance, use the Western Union app to send money and see the current exchange rates right away.
3 Tips for Sending Money During Inflation
1. Compare rates and total cost
Use Western Union’s currency converter to see today’s rate and transfer fees before you commit. Learn how to get the best exchange rate.
2. Use exchange rate alerts or time your send
If your currency is strengthening, consider scheduling a larger transfer when the rate is favorable. If it’s weakening, you might split transfers to avoid poor timing.
3. Pick the right payout method
Cash pickup can be fast when urgency matters; bank transfers or mobile wallet payouts can be cost-effective for routine sends. Your choice can impact fees and availability.
Making Money Transfers Simple
Rising interest rates and inflation can take a big bite out of your budget. Keep your money transfer costs under control with Western Union’s tools. Use the online currency converter to understand today’s exchange rates for your chosen currencies. Send money now and see how much your recipient will get when you send a cross-border payment.
FAQs
Generally speaking, higher inflation tends to weaken a currency, such as USD, because it decreases buying power. However, many factors affect how strong the US dollar is compared to other currencies. If the Fed raises rates to cool inflation, it could be good for USD by attracting foreign investors.
Inflation is the rate of cost increase over time When inflation goes up, it can make the cost of international money transfers more volatile. Decreased purchasing power can push exchange rates down, meaning the recipient receives less local currency. However, many factors affect money transfers besides inflation, which is why many people track exchange rates frequently.goods and services.
