Inflation

There is an interesting debate on what should be the ideal rate of inflation. According to Milton Friedman’s paper on monetary stability published in 1948 the ideal rate should be 2.5%. This is the rate in China and many Western countries but they also have economic growth of more than 10%, whereas in India at the moment the growth is 8.1%. So with regards to India the Chakravarty report of 1986 said that the inflation rate should be 4%.The rate of inflation can vary from country to country. But in today’s context anything more than 5% is alarming. It is important for the government to see that measures to reduce inflation should not affect the growth of the economy; some argue that it is better to have 9% growth and 6% inflation than 6% growth and 5% inflation. Monetary policy is known to play an important role in reducing inflation, but what if one of the causes behind inflation is shortage in supply of certain products. When there is shortage in supply and products have to be imported, the government will try to reduce import duty and customs. So therefore this sector where imports are needed, will not respond to monetary policy. And since in India we also have a lot of black money circulating, the effectiveness of the monetary policy is reduced. The point remains that to tackle inflation the government needs to look into a variety of sectors and policies, along with monetary policy being effective the government should also try to reduce the fiscal deficit.

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One comment on “Inflation

  1. ggwfung says:

    that’s a very fine question Ashmu.

    A related economic question is what is the ideal rate of unemployment. To the general public, they would say zero! that way everyone has a job, but having full employment is a brake on economic growth. Businesses can’t take on new staff easily (they have to hire them away from other companies), there is not a large pool of workers to draw on for infrastructure projects.

    So if I haven’t wandered too far away from the original question, there probably is an ideal unemployment rate for solid economic growth.

    ggw

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