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Harmonics in power system are harmful to power network. In order to analyze power system harmonic more accurately, a new harmonic analysis algorithm based on interpolating windowed FFT and wavelet transform is proposed. This approach overcomes the shortcoming of FFT having frequency domain localization ability, but without time-domain localization ability. In this paper, the original signal is decomposed into the high-frequency component and the low-frequency component by the discrete wavelet transform. The low-frequency part is analyzed by interpolating windowed FFT algorithm to get the amplitude and phase of every steady harmonic. Simulation experiments are conducted with Matlab. The experimental results show that this method can not only analyze the steady-state harmonic accurately, but also inspect non-steady harmonics effectively.