Inflation in common terms refers to the persistent rate of increase in the general prices of goods and services in an economy. Inflation is generally calculated as annual percentage increase based on the Consumer Price Index like in the Nepal. After the recent financial meltdown in the west and the resulting economic downturn, many western economies are seen employing inflation as a solution to revitalize their ailing economies. But, is inflation the answer for the economic woes of the west?

Everyone reading the papers hear about how inflation is burning into the common man’s pockets. But, inflation has both advantages and disadvantages. A moderate rate of inflation is a healthy sign of a growing economy. When the demand for goods and services increases, the prices tend to edge up. This boosts the production in an economy as the supply tries to meet the rising demand.

On the other hand, too much inflation in the prices of consumer goods is detrimental to the economy. A rapid increase in the inflation rate drastically reduces the purchasing power of the consumers. So, a high rate of inflation for long periods will reduce the demand for goods, reducing growth and production, which negatively affects the economy of a country.

Economic revival measures like the quantitative easing policies, introduced by major western economies like US, pumped huge amounts of cash into the economy to increase liquidity. As intended, with more demand than supply these measures marginally increased the inflation rate.

Through the three phases of QE policies, hundreds of billions of dollars have been pumped into the struggling U.S economy, increasing the Federal Reserve’s Treasury notes to 2.054 trillion dollars from a mere 700 to 800 billion dollars. Similarly, the European and British central banks are reported to have infused around 489 billion Euros and 375 billion pounds respectively. Japan plans to pump another 1.4 trillion dollars in its next economic stimulus package.

Now, in an economy where the growth has stagnated due to saturation in demand, artificial inflation will help in jump starting the economic growth. But, this is not the case in western economies like the U.S that is struggling with a stagnant CPI of 1.1% to 2%, with a sluggishindustrial production that only increased marginally by 0.1% in May, 2013.In such situations, therise in inflation rate will causedecline in the purchasing power. And the falling interest rates will badly hurt the common man who depends on his savings.

Therefore, creating artificial inflation is like using a pain killer that will no doubt temporarily alleviate the pain. But this will not help address the root cause of the pain, like it will not help struggling economies whose root cause is declining production levels. In the long run, artificially propping up the inflation rate would backfire by reducing the value of the currency and plunging the economy into deeper crisis.

Thus, economic reforms that directly target to increase industry production levels and simultaneously increase liquidity would be the best strategy for countries ailing from deflation and declining growth. This is the best solution for the currently struggling western economiesto achieve a sustained, long term revival of economic growth andto regain their past glory.