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In theory, raising interest rates makes it more expensive for both businesses and consumers to borrow money. So businesses cut back somewhat on expansion plans, and consumers cut down somewhat on spending. Less spending means less demand for goods and services which should mean, eventually, an excess of supply. And when there's too much of something around... the price doesn't usually go up. That's the theory.
It doesn't always work like that. Especially when governments keep increasing the money supply by running continual deficits. So on the one hand, we raise interest rates to make borrowing more expensive and thus reduce consumption and inflation; while on the other hand we allow the government to print more and more "free" money in the form of treasury bonds, which tends to _increase_ consumption and thus inflation.
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