Could someone please explain to me the relationship between interest rates and inflation and recessions. What causes inflation?

Thanks.  I really like this forum. Everyone is so helpful. :)

What causes inflation?  Our economics class did a study on this in college. 

We researched and tracked the M1/M2/M3 supply fluctuations over several years and compared the changes to fluctuations in the consumer price index.  It was uncanny.  A change in M1 started a re-doubling rollover in the money supply, which produced a directly proportional matching change in the CPI almost exactly 2 years later. 

That means that if the government puts a massive infusion of cash into the economy in early 2009, we should expect to see a massive jump in the inflation rate in early 2011.

You earn a dollar and spend it.  The person you buy from then buys from another person, who buys from a 4th person, who buys from a 5th person, and so on, and so on.....  Eventually that dollar gets invested somewhere and the rollover rate slows.

Steering the economy with cash infusions and interest rate fluctuations is like steering an aircraft carrier with a tugboat.  It will turn, eventually, but it takes a lot of time to produce the necessary momentum.  And when the economy finally does start turning (inflation starts rising) it is equally difficult to put on the brakes.

Interest rates influence the supply of money, not the other way around.  The current interest rate is a government policy decision.

Congress increases M1 by printing money.  Congress controls M1 by controlling government spending (which competes with private spending for the same supply of goods) and by controlling tax rates (which deprive private people and businesses of money to spend and invest, therefore controlling demand).

The Federal Reserve controls M1 by changing the Discount Rate (the interest rate), by buying and selling government securities, and by changing the Reserve Ratio (the minimum amount of money banks must hold in cash instead of lending out).  Raising the Discount Rate normally increases saving, decreases borrowing, and decreases the money supply.  However, we are currently experiencing a period of irrational fear wherein people are saving even though they are earning nothing on their money.

Actual interest rates went down because the Federal Reserve pushed the rates down about year or so ago in an attempt to minimize the cumulative inflationary pressures from other sectors of the economy, when the stock market was climbing too fast.

Interest rates are still down today because the president thinks people will borrow and spend more if money is cheap.  It's not working.  People are scared, so personal savings rates are higher than they have been in decades despite the low interest rates.  They're paying off debt and stuffing money in mayonnaise jars and under mattresses.  We'd be better off if the president would let the Federal Reserve raise the Prime Rate, so that we could earn a decent rate of return on our money instead of keeping it in a mattress.

If businesses could earn a decent rate of return on their money they could hire more people and increase production.  Instead, the president has decided that businesses should be taxed more and government unemployment payments should be extended.  When the stock market plummeted and high-end jobs got scarcer, this actually gave people an incentive to NOT look for work.  The result is that the IRS is now reporting current tax revenues are far lower than they have been in years, despite the increased tax rates on "the rich."

However, now that the extended unemployment benefits are starting to come to an end, those same people whose unemployment benefits have now been cut off are more willing to take the lower-end jobs they were snubbing.  They're ceasing to be tax-money-users and starting to become tax-money-producers.

In a recession the economy slows down and inflationary pressures drop.  Profits fall, marginally performing businesses fail, and unemployment rises.  In the short run a healthy "trimming the fat" effect occurs.  If it goes on too long, a dangerous deflationary period may result which goes beyond fat-trimming and starts cutting into otherwise healthy resources.  We are right now teetering on the brink of a deflationary period.  (The cure? See the above comments about businesses being able to earn a decent rate of return on investment.)