The Reserve Bank of India (RBI)’s inflation targeting is, in ways, embedded in the Phillips curve framework, which supposes an inverse relationship between unemployment and inflation in the short run – implying economic growth pushes up inflation and pulls down unemployment, and vice versa.

In fact, this is what lends intuitive support to a counter-cyclicalmonetary policy to stabilise inflation.

But India’s headline retail inflation, or inflation based on the consumer price index (CPI), has defied this relationship of late. CPI inflation printed at 7.6% for October, the highest in more than six years, even though the economy is faced with large-scale losses.

A recession-inflation situation such as this is highly undesirable and becomes a policy nightmare. Here’s why.