Growth, Inflation, and Interest Rates

Why this matters

News about the economy is constant, and much of it moves markets for a day and is forgotten. Three numbers come up again and again because they shape almost everything else: growth, inflation, and interest rates. Understanding what they measure, and how they connect, makes the headlines far less confusing.

Growth

Economic growth is usually measured by gross domestic product (GDP), the value of all the goods and services an economy produces. "Real" GDP adjusts for inflation, so it measures how much more is actually being produced. In the US, it's published by the Bureau of Economic Analysis and reported as an annual rate.

The Federal Reserve's September 2026 projections put longer-run US growth at about 2% a year after inflation.¹ Faster growth generally means rising company sales and profits; slower growth, or shrinking output, means the reverse.

Inflation

Inflation is the rate at which prices rise across the economy. The most-quoted measure is the Consumer Price Index, published monthly by the Bureau of Labor Statistics. Economists also watch inflation "excluding food and energy," which strips out the most volatile prices.

The Federal Reserve aims for inflation of 2% a year over the longer run, measured by a related index of personal consumption expenditure prices.² Part 1's Inflation and Purchasing Power showed what inflation does to cash over time.

Interest rates

An interest rate is the price of borrowing money. The rate that anchors many others is the federal funds rate, the rate banks pay for overnight borrowing, which the Federal Reserve targets. Longer-term rates, like the yield on 10-year Treasury bonds, are set by the market and reflect expectations about future inflation, growth, and short-term rates.

Measure	Latest reading	Source and date
Real GDP growth	2.2% annual rate, April to June 2026	BEA, September 30, 20263
Inflation (CPI)	3.4% over the 12 months to August; 2.4% excluding food and energy	BLS, September 11, 20264
Unemployment rate	4.2% in September	BLS, October 2, 20265
Federal funds target	3.75% to 4%, raised a quarter point	Federal Reserve, September 16, 20266
10-year Treasury yield	5.29% on September 30	US Treasury7

These numbers change every month. They're here to show how the pieces fit together at one moment, not to predict what comes next.

How they connect

The three numbers influence each other in a loop:

• Growth can push up inflation. When demand for goods, services, and workers is strong, prices and wages tend to rise.
• Inflation tends to push up interest rates. Lenders want to be paid more than inflation, and the Federal Reserve raises its target to bring inflation down. In September 2026, with inflation above its 2% goal, the Fed raised its target range, saying the move would support a timelier return to that goal.⁶
• Higher rates tend to slow growth. The Fed explains that when borrowing costs fall, households spend more and businesses invest more, and the reverse happens when they rise, though the effects are neither direct nor immediate.⁸

What it means for your investments

• Savings and cash earn more when short-term rates rise, and less when they fall.
• Bonds fall in price when rates rise, more so for longer-term bonds, as Part 2's Why Bond Prices and Yields Move in Opposite Directions explained.
• Stocks are affected two ways: through company profits, which depend on growth, and through the discount rate. Higher rates make future profits worth less today, as Part 4's Time Value of Money and Discount Rates showed.

Markets react mostly to surprises. A number that's high but expected may barely move prices; a smaller number that wasn't expected can move them a lot. That's why Part 1's Why Prices Move emphasized expectations.

Key takeaways

• Growth is measured by real GDP, inflation by price indexes such as the CPI, and the key short-term interest rate is the federal funds rate.
• Growth can push up inflation, inflation tends to push up rates, and higher rates tend to slow growth.
• In early October 2026: growth about 2.2%, CPI inflation 3.4%, unemployment 4.2%, and a Fed target of 3.75% to 4% after a September increase.
• Rates affect investments directly: savings yields, bond prices, and the value of future company profits.

Check your understanding

Inflation is running above the Federal Reserve's 2% goal. What's the Fed's typical response?

1. Lowering its interest rate target, to encourage more spending and borrowing.
2. Raising its interest rate target, to slow borrowing and spending.
3. Leaving rates alone, since inflation doesn't respond to interest rates.

Long-term interest rates rise sharply. What tends to happen to a long-term bond fund you own?

1. Its price rises, since the bonds it holds now pay more interest than before.
2. Nothing, since bond funds hold their value whatever interest rates do.
3. Its price falls, since older bonds paying less become worth less.

What's next

The Federal Reserve sits at the center of this loop. Central Banks and Monetary Policy explains what it does, how it decides, and why investors watch it so closely.