***A country needs to update its CPI index by allowing the inclusion of factors that tend to subsume the actual impact of inflation. Inflation should be tackled to promote growth but the means should never end the end itself***

THERE Is very little disagreement to the Ihesis that inflation —

1 a sustained rise in the level of general prices — hurts eco noniK growth Inflation is unpopular and where elec torates have a say by votes politicians tend to downsize it adoring It as a prime objective. No sensible policy makers could be found to condone a higher inflation to erode their support among people The ways that inflation adversely affects growth are also clearly spelled out in existing economic literature uncertainty about future prices that in turn affects de < isions about spending sav Ings and Investment and thus misaligning optimum re source allocation: borrowers gain al the cost of the len ders which in its tenure dis courages savings etc

The statistical evidence with respect to the above episode is crystal clear Scatter plot of inflation against growth for a number of countries do point to a crude line of best fit where the line Is observed to be sloping downwards implying an inverse relationship between these two variables, inflation

and growth However, as some economists would tend to argue the scatter diagram so drawn fails to consider many other factors that directly or Indirectly, contribute to economic growth So long one can strip away these other factors the task of establishing a true rela tionship stands with serious doubt As there is no dearth of "other factors'" of economic growth besides Inflation, so is there no shortage of ways in doing the exercise The prevalence of many factors and many ways do in fact tend to confuse econometricians vying for a true rela tionship

Robert Barro, (a renowned professor of economics from Harvard University) seems to show the quite opposite to what has been discussed be fore. Mr Barro chose the pe riod 1960 1990 (30 years) and 100 countries (both rich and poor) to examine the in flatlon — growth nexus. He observed a cyclical connec-

tion between growth and in nation with i rise in both during the booms and a fall during the slumps According io Mr Barro, inflation Is one of a panoply of factors that af fects growth The other factors. as we all know are ini

other end of the spM'rum also e g growth to inflation Uninft inMrumrntAi variables he attempted to isolate the effects of these exogenous changes on growth The findings show that if inflation hikes bv title per'entage pot

tial Incomes, educational at tainment and life expectancy aggregate government spending the extent of the rule or law and democratic rights investment etc Mr Barro tends to argue that the causal connection may not emanate directly from Inflation to growth, rather, each of them might be Jointly Influenced by some other variables or the causation could run from the

nt. rate of economic growth would dwindle by 0 02 or by 0 03 of a percentage point per annum This implies that an inflation rate of 100 per cent a year would rob a country of a growth of two to three percen'age points The amount sounds subst-iutnl from growth perspective But If that country aims to cut down inflation rate from, say seven per cent to two per

terr it could see that its gr >wth rises by only a little more than one tenth of a percentage point One should however take also into consideration the costs" of lowering inflation since that claims loss of output and jobs Mr Barro argues that the magnitudes may not be that large but over the long periods an apparently small change in the average growth rate may have dramatic ef fects on standards of living. Enpassart one would possibly recall that Mr Barros es 11mates are at a lower side when compared with some other studies juggling with inflationary impacts of

The fight against inflation is again fraught with many pitlalls How to measure the i flanges in the rates of inflation? In general, in every country whether rich or poor. CPI index is used to weather the change But the rationale of using a stipulated basket of commodities with

out showing any respect to the changes in quality of products, technological improvement in production process etc. Is construed as unqualified submission to the monster Suppose a country experiences an Inflationary growth rate of 3 per cent per annum and to that effect aims to index the wage level by 3 per cent per annum with a view to keeping real wage constant The pertinent question Is. what happens if the inflationary growth rate so assumed is unable to portray the true picture (say 2 per cent actual vs. 3 per cent as shown) That country, obviously. might face a huge budget deficit which would aggravate Its inflationary situation An accurate measure of inflation is thus called for before embarking on a wage indexing or some other steps to subdue the impact of Inflation. That. In fact, is the crux of the problem. A country needs to update its CPI index by allowing the inclusion of factors that tend to subsume the actual Impact of Inflation Inflation should be tackled to promote growth but the means should never end the end itself.