An innovative inertial vibration sensor based on moiré fringe, which was generated by the relative movement of a pair of parallel gratings, is presented. One of the gratings was mounted on an inertial mass which was a part of the spring–mass–damping system, whereas the other was fixed to the sensor shell. The relationship between the moiré fringe and the vibration state of the measurand was discussed in detail. By using the signal processing system board, together with a unique algorithm of subdivision and direction recognition, the moiré fringes were converted into the direction and amplitude of the relative displacement with high resolution. The maximum amplitude of the relative displacement measurement is 2.5 mm with maximum error of 0.056 μm and the measurement resolution can reach to 0.028 μm. Furthermore, a temperature compensation circuit was also designed and tested, which indicates temperature immunity when taking photoelectric conversion into account. Finally, a digital compensatory filter for broadening the dynamic bandwidth with flat frequency response was developed to meet the demand in vibration measurement in the low frequency range. As a result, a linear response over a broad frequency range from 0.1 to 1000 Hz was realized.