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Inflation Theory Comes Full Circle
A public interchange among some leading macroeconomists suggests a change in the way inflation is perceived by the profession. It is increasingly being recognised that inflation can be the outcome of a conflict over income, reflected in the continuous attempt by the firms to raise prices and by the workers to raise wages in order to gain a larger share of it. At least some part of the inflation in India can be seen as a conflict over income shares and sketches a theory of inflation suited to its economy. Against this background, the effectiveness of inflation targeting is touched upon—the inflation-control strategy of the Reserve Bank of India—and the necessary steps to curb inflationary pressure in India are pointed out.
In a sign of the times, a turn in the public understanding of an important aspect of economic policy first appeared on Twitter. Intervening in the global discourse on inflation, one of the world’s most recognised macroeconomists, Olivier Blanchard, sparked a conversation by stating that inflation reflects a conflict over income.1
The conflict is manifested in the continuous attempt by firms to raise prices and by the workers to raise wages to gain a larger share of the national income. This is the wage–price spiral that keeps the inflation alive.
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