One might wonder why the problem of High inflation is being highlighted in today's scenario where Deflation is the reason that Policy makers get sleepless nights.
The reason is very simple - Deflationary forces take over once and finally once and for all when monetarist expansion in the form of loose credit norms and laissez-faire banking gives way to disproportionate asset price exuberance in every sector of the economy, notably but not limited to real estate, perishable hydrocarbons and indirectly raises the rate of inflation into the uncomfortably high territory. Lax monetary policy tolerates these excesses, until social tensions spill out in the open arising due to intolerably high inflation. Taking away the punch bowl too late is the harbinger usually of a long drawn tug of war between asset prices, credit and inflation which ultimately impacts output negatively in both quantitative and qualitative ways. The end result is always deflation as the output gap against potential output and falling capacity utilization levels hit employment and wages in a deflationary spiral.
The key lesson is that high inflation must be avoided at all costs - if not just to avoid the deflation that usually follows such monetary binges. Flashes from Phillip's curve that imply better employment figures with higher inflation must be tempered with the fact that the same Phillip's curve foretells high unemployment when deflation takes over. Moderation is indeed a very important watchword for those in control of the Monetary levers.
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