Inflation is the rise over time in the prices of goods and services usually measured as an annual percentage, just like interest rates. Inflation is the natural byproduct of a robust, growing economy. No inflation or deflation (the lowering of prices), is actually a much worse economic indicator. Also, in a healthy economy, wages rise at the same rate as prices. Interest rates is just one factor(but a major driver) affecting the inflation.
There are 2 theories to explain the relation between inflation and economy. Demand-pull theory: Lesser Interest rates will attract lesser savings. So, people tend to spend more when the interest rates are less. Thus creating more demand for goods and services. Lesser Interest rates will encourage people to borrow more money/ So, again people tend to spend more borrowed money when the interest rates are less. Thus creating more demand for goods and services. When supply of goods and services is less than the demand, prices go up. This also results in inflation. Cost-push theory: When the cost of the raw materials and inputs increases, the cost of end products also increases. This rise in cost of goods and services pushes the price higher resulting in higher price.
