16. On the Economy

All the segments discussed above belong to an economy, but we must know the overall short-term and long-term impacts of inflation on an economy.

Experiences of the world economies in the late 1980s show that a particular level of inflation is healthy for an economy. This specific level of inflation was called as the ‘range’ of inflation and every economy needs to calculate its own range. Inflation beyond both the limits of the range is never healthy for any economy. In the case of India, it is considered 2 to 6 per cent at CPI(C), which is also known as the ‘comfort zone’ of inflation in India since 2015. Similarly for Australia, New Zealand, the USA, Canada and the European Union, the healthy range today is 1 to 3 per cent. This is why every economy today utilises inflation targeting as part of its monetary policy.

Inflation beyond the limits of the decided/prescribed range brings in recession to depressions. (We will see them in Section B of this Chapter, ‘Business Cycle.)