Shrinking Money and High Inflation
SHRINKING value of money because of persistent high inflation explains the importance of anti-inflationary monetary policy. For a country with large percentage of population still living below the poverty line, inflation works as a regressive tax.
Economic welfare of the population at large could be enhanced primarily through higher growth, that too in a low and stable inflation environment. That suggests why balancing growth and inflation becomes so important to monetary policy. It is a much more complex task than what may appear in any public discussions. To ensure that the grease effect of modest inflation allows economic growth and investment activities to materialise, inflation would have to be positive. A positive inflation within the threshold level would not mean erosion in purchasing power since higher growth would also raise the income levels, and as a result, net purchasing power would increase. Unless the benefits of growth get equitably distributed, this net increase in purchasing power may not happen to all. At the aggregate level, some positive inflation that coexists with high growth could be welfare maximising. At high inflation, particularly above threshold level, growth may however, moderate, and both high inflation and low growth could erode welfare.
From a speech of HR Khan, Deputy Governor, RBI.