Interest Rate increases that I just don't get!!

Maybe I have my head up my ass and I know that I am not an economist by any means but I don't understand the interest rate. My cursory understanding is if people start to spend at a higher rate this will cause demand (for products) to increase and as a result businesses raise prices (and then you have inflation). To combat this the Bank of Canada increases interest rates to limit the amount of disposable income available to spend therefore increasing supply and lowering costs.

From my experience I do not see that people from my peer group have an abundance of disposable income. I am a married father of two and the costs are staggering. For example, if you consider that daycare costs the same amount as your monthly mortgage payments then one can see how cash strapped many families are. With so little disposable income I don't see where inflation is being derived from?

That being said in our world today government, utilities, banks and insurance companies are the industries that are all taking their pound of flesh from the middle and lower middle class people of society. There increased costs are not based solely on an increase in demand. These industries are either monopolies or necessities for society. Every time you turn around we are told that they have to increase insurance rates to cover 9/11 or that gas rates have to rise because of a potential storm (then it takes triple the time for rates to fall when the storm does not impact supply) or the banks have to raise convenience fees (even thou they become less convenient) or electricity prices have to rise because the government mismanages and then privatizes the utility. All the aforementioned businesses keep raising prices (causing inflationary pressure) and reaping enormous profits.

I guess the questions that I have are, by raising interest rates will it stop people from spending money on necessities or government imposed businesses? Is this not just another punishment to the middle class? Wouldn't government regulation (i.e. public insurance) achieve the same results with a lot less damage to families (closing of small business, personal bankruptcies, job loss)?