Why the economy needs 4% inflation

Low inflation numbers are worrying economists as inflation needs to be not too high, but also not too low. The target of 4% serves growth without an overheating of the economy

- Monika Halan

It is true that a happy economist is hard to find. Take the case of inflation. Grey heads were shaking just last year, stressing that inflation was too high. And now the same people are wrinkling their high foreheads about inflation that is too low. It is not just low, but items such as food have seen a price deflation — images of unsold tomatoes rotting popped up everywhere a few weeks ago. It is important for an economy to get the inflation number right because it impacts growth, wages, tax revenue collection, farmer incomes and gives signals on demand. ‘An overheated engine needs water to cool it, and on a cold, winter morning, it needs a dhakka (push) start. Like a yoga posture, the inflation number needs to be perfectly balanced — too high or too low signals red.