Interest Rates, Exchange Rates, and Inflation: The Three Keys to Reading Economic News

• Interest rates are the price of money. When they rise, borrowing costs more; when they fall, money flows more freely.
• Exchange rates reflect your currency's value abroad. A rising USD/KRW rate means the Korean won is weakening against the dollar.
• Inflation measures the cost of living. Higher inflation means your money buys less than before.
• These three indicators are interconnected. When one moves, the others respond.

Why These Three?

Turn on any financial news channel, and you'll be bombarded with numbers—stock indices, GDP growth, unemployment rates, trade balances. It's overwhelming. But here's a secret: 80% of economic news can be explained through just three concepts—interest rates, exchange rates, and inflation.

These three are the economy's vital signs. Just as doctors check temperature, blood pressure, and pulse, economists monitor interest rates, exchange rates, and inflation. By the end of this guide, you'll be able to read economic headlines and think, "Ah, so that's what it means."

Interest Rates: The Price of Money

What Are Interest Rates?

An interest rate is the cost of borrowing money—think of it as the "rental fee" for cash.

If you lend a friend $1,000 and ask for $1,050 back in a year, that's a 5% interest rate. Banks work the same way. When you take out a loan, you pay back the principal plus interest. When you deposit money, the bank pays you interest.

Policy Rate vs. Market Rate

You've probably heard news like "The Fed raised interest rates." But which rate exactly?

The policy rate is like a traffic signal. When the light turns red, cars stop. When the central bank raises rates, market rates follow—though not always in lockstep.

What Happens When Rates Rise or Fall?

Rate Hike (↑)

• Higher borrowing costs → Reduced spending & investment
• Higher savings returns → Incentive to save
• Stock market → Typically faces downward pressure
• Real estate → Cooling effect

Rate Cut (↓)

• Lower borrowing costs → Encouraged spending & investment
• Lower savings returns → Search for yield elsewhere
• Stock market → Typically gains momentum
• Real estate → Potential overheating

How to Decode the News

Breaking this down:

• The Federal Reserve kept rates unchanged
• But signaled that cuts might come later this year
• → Markets interpret this as "borrowing will get cheaper soon"
• → Stocks rally, dollar may weaken

Key insight: The direction matters, but forward guidance—what central banks signal about future moves—often matters more.

Exchange Rates: Your Currency's Global Identity

What Are Exchange Rates?

An exchange rate is the price of one currency expressed in another.

When you see "USD/KRW 1,400," it means you need 1,400 Korean won to buy one US dollar. If you've ever exchanged money for a trip abroad, you've experienced exchange rates firsthand.

What Happens When Rates Rise or Fall?

Here's where many get confused. When the USD/KRW rate rises, it means the won is getting weaker, not stronger.

Memory trick: When the exchange rate number goes UP, your local currency's value goes DOWN (inverse relationship).

Why Do Exchange Rates Move?

Exchange rates are determined by supply and demand. If more people want dollars, the dollar strengthens (USD/KRW rises). If more people want won, the won strengthens (USD/KRW falls).

Key drivers of exchange rates:

• Interest rate differentials: Higher US rates vs. local rates → capital flows to US → dollar strengthens
• Economic outlook: Strong domestic growth → foreign investment inflows → local currency strengthens
• Risk sentiment: Global uncertainty → flight to safety → dollar (as reserve currency) strengthens

How to Decode the News

Breaking this down:

• The Korean won is at its weakest level against the dollar in three years
• Import prices (oil, commodities) face upward pressure
• Overseas travel and study abroad become more expensive
• Export-oriented companies (Samsung, Hyundai) may see currency gains

Key insight: When reading exchange rate news, always ask: "Who wins and who loses?"

Inflation: The Economy Your Wallet Feels

What Is Inflation?

Inflation refers to the general rise in prices of goods and services over time.

If a cup of coffee cost $3 last year and $3.50 this year, that's inflation at work. When prices rise, the same amount of money buys less. This erosion of purchasing power is what economists call inflation.

Key Inflation Indicators

Common inflation metrics you'll encounter in the news:

Why track core inflation separately? Food prices can spike after a drought, and oil prices swing with geopolitical events. Core inflation strips out these volatile components to reveal the underlying trend.

Inflation vs. Deflation

Moderate inflation (around 2% annually) is actually a sign of a healthy economy. The problem arises when inflation runs too hot (overheating), too cold (stagnation), or goes negative (deflation).

How to Decode the News

Breaking this down:

• Prices are 3.2% higher than November last year
• Three consecutive months above 3% suggests a trend, not a blip
• Central banks will find it harder to justify rate cuts
• Real wages (nominal wages minus inflation) are effectively shrinking

Key insight: In inflation news, focus on the trend. A single month's figure matters less than the trajectory over several months.

How They Connect

Interest rates, exchange rates, and inflation don't operate in isolation. They're interconnected like gears in a machine.

Scenario: The Fed Raises Rates

1. Fed rate hike
2. US investments become more attractive → capital flows to US
3. Dollar strengthens / other currencies weaken
4. Import costs rise in other countries
5. Inflation pressure abroad
6. Other central banks consider rate hikes too

Scenario: Oil Prices Surge

1. Oil price spike
2. Higher import costs → increased demand for dollars
3. Local currencies weaken against dollar
4. Fuel, heating, transport costs rise → inflation picks up
5. Central banks face pressure to raise rates

Quick Reference: The Connections

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