Inflation is the rate at which the general level of prices for goods & services soar which means

the purchasing power of the country surges. Generally, a country tries to maintain single digit inflation rate, but perhaps a low inflation rate can also be a downside for a country. To control inflation, the central bank does tighten the monetary policy e.g. increase in the interest rate. An increase in the interest rate has a side effect of curtailing the investment & employment leading to a slump in growth. India saw a sharp downfall in growth for about 5 years after higher interest rates during 1995-96. The tussle always subsists between Inflation & Growth in any country, especially developing economies. There exists one school of thought which says that higher interest rates contain inflation & another school of thought says that lower interest rates lead to better growth. For instance, recently RBI went for 2 subsequent hikes of interest rate with a hike of 25 bps on repo & reverse repo rate on 2nd July & another 25 bps on 27th July to contain the inflation. But higher interest rates can lead to unemployment, so a person would prefer a low paying job with 12% of inflation rather than no job. Sustained growth caused by rising aggregate demand can lead to acceleration in inflation as the economy uses up scarce resources and short run aggregate supply becomes inelastic. When SRAS is elastic, an outward shift of aggregate demand can easily be met by a rise in real GDP (there is plenty of spare capacity and supply responds elastically to the higher level of AD). But when SRAS becomes inelastic, the trade-off between growth and inflation worsens an increase in AD tends to lead to higher prices rather than increased output and employment. The trade off between growth and inflation can be avoided if an economy is able to increase potential output by improving their supply-side performance. For example, LRAS can be increased by achieving sustained improvements in productivity, advances in technology and the benefits that come from product and process innovations. Potential output is also increased by expanding the stock of capital goods (via higher investment) and through an increase in the available labour supply. An outward shift in LRAS means that the economy can meet a higher level of aggregate demand without putting upward pressure on the general price level. Economic growth requires maintaining a low interest rate regime whereas inflation management warrants raising interest rates.