Definition: Inflation refers to the appreciable and persistent rise in the general price level. The economists do believe that the inflation beyond the moderate rate is bad and can be disastrous. Therefore, the inflation must be kept under control.
What is a Moderate Rate of Inflation? There is no specific answer to this question. But, however, on the basis of the past experiences it has been observed that 1-2% of inflation in the developed countries while 4-6% of inflation in the developing countries is regarded as a desirable limit of moderate inflation.
As the general level of price rises above the prescribed limits of inflation (as mentioned above), the macro variables are adversely affected by the price rise. Also, the policy measures to control inflation are undertaken to tame the situation because controlling measures not taken in time may distort the price system and may disturb the employment and growth process. The various measures used for controlling inflation can be classified under:
- Monetary Measures to Control Inflation
- Fiscal Measures to Control Inflation
- Price and Wage Control
The moderate rate of inflation is considered to be desirable and varies from country to country and from time to time. The desirable limit of inflation depends on the need and absorption capacity of the country and can be determined on the basis of; whether the inflation results in overheating of the economy, whether the macro variables, Viz. Saving, Investment and Growth of output diminish despite the inflation, whether the employment gets adversely affected, etc.
Thus, every country should decide its desirable rate of inflation and keep the inflationary factors under control.