Answer:

♤ Inflation refers to the persistent rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

♤ A little inflation is usually the sign of an economy that is growing. It encourages investors to invest and hence leads to further growth. Hence some inflation is desirable and may be inevitable in a developing economy. Thus, inflation remains favorable to growth if it is not very high. There is also evidence to show that an environment of low and stable inflation is a necessary precondition for sustainable growth

♤ However, beyond a point inflation begins to eat into the growth itself because –

o It encourages spending instead of long term investing

o It increases the cost of living so the households have less to save

o It erodes the value of currency vis-à-vis others and thus may lead to troubles on external front

o Morally also inflation is a regressive tax and it hurts the poor the most.

♤ Thus, the relation between the two is not linear. Hence efforts should be made to bring down excess inflation while promoting growth.

♤ In the ultimate analysis – both high inflation (which exists due to supply side constraints) and low growth can be tackled by having a stable and conducive policy environment.