How does inflation typically influence interest rates?

Inflation typically influences interest rates in such a way that when inflation rises, interest rates also tend to increase. This relationship is grounded in economic theory; lenders need to compensate for the decrease in purchasing power that occurs when prices rise.

When inflation is expected to increase, central banks, such as the Federal Reserve, may raise nominal interest rates to curb spending and ensure that inflation doesn’t spiral out of control. Higher interest rates help to reduce demand in the economy, as borrowing becomes more expensive, which can lead to a stabilization of prices.

Additionally, if lenders anticipate higher inflation in the future, they will demand higher interest rates on loans to offset the potential erosion of the money's value over time. This expectation helps to maintain their real returns on investments.

Thus, the correct answer indicates that rising inflation leads to higher interest rates, reflecting how economic actors respond to changes in the price level.