Volume : 2, Issue : 8, AUG 2016

BENIGN INFLATION: MEANING, CHARACTERISTICS, CAUSES AND ITS ROLE IN ECONOMIC GROWTH

DR. ANIL KUMAR PARIHAR

Abstract

Inflation is one of the most important macroeconomic phenomena affecting the functioning and performance of an economy. It refers to a sustained increase in the general price level, resulting in a decline in the purchasing power of money. However, the economic effects of inflation depend significantly upon its rate, stability and predictability. A low and manageable increase in the general price level may not necessarily be harmful to economic activity. Such a situation is commonly described as benign inflation. The present paper examines the meaning, characteristics, causes and economic significance of benign inflation, with particular emphasis on its relationship with economic growth and macroeconomic stability.The paper explains that benign inflation is characterized by a relatively low, stable and predictable rate of increase in prices. Unlike rapid or volatile inflation, it does not seriously disturb consumption, investment, employment or economic planning. Its causes may include moderate increases in aggregate demand, expansion of money and credit, growth in investment and employment, moderate increases in input costs and improvements in production and productivity. Stable inflation expectations also contribute to maintaining inflation at a manageable level.The study further examines the relationship between benign inflation and economic growth. A moderate increase in prices may encourage producers to expand production and investment when demand is rising. It may also reduce the tendency of consumers and businesses to postpone expenditure in anticipation of falling prices. Consequently, benign inflation can coexist with increasing output, employment and investment. At the same time, the paper emphasizes that inflation is not automatically beneficial. When price increases become excessive, uncertain or persistent, they can reduce purchasing power, discourage savings and investment, increase economic uncertainty and adversely affect long-term growth.The paper also considers the relationship between benign inflation, price stability and macroeconomic stability. Price stability does not necessarily imply absolutely unchanged prices; rather, a small and predictable rate of inflation may be consistent with a stable economic environment. The maintenance of benign inflation requires appropriate monetary and fiscal policies. Monetary policy influences interest rates, liquidity, money supply and credit conditions, while fiscal policy affects aggregate demand through taxation, public expenditure and government borrowing. Effective policy coordination and credible communication are important for keeping inflation expectations under control.The Indian context receives particular attention because inflation in India is influenced by food prices, energy costs, supply constraints, demand conditions and international economic developments. The relatively high importance of food in household expenditure makes inflation an important concern for purchasing power and living standards. By 2016, India had moved towards a formal flexible inflation-targeting framework, with greater emphasis on consumer price inflation and the role of the Reserve Bank of India in maintaining price stability.Overall, the paper concludes that benign inflation represents a condition in which a low, stable and predictable rise in prices can coexist with economic expansion. Its contribution to growth depends upon the balance between aggregate demand and productive capacity and upon effective economic policy. Therefore, the objective should not simply be to eliminate inflation, but to maintain it at a stable and sustainable level that supports economic growth, employment, investment and overall macroeconomic stability.

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References

8.1 Books and Textbooks
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a) Reserve Bank of India. Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework, 2014. Reserve Bank of India, Mumbai.
b) Reserve Bank of India. Statement on Developmental and Regulatory Policies, various issues. Reserve Bank of India, Mumbai.
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