The impact of inflation on dispersion of relative prices is examined in a cointegration framework using a data set of all seven components of the consumer price index from India. The empirical evidence indicates that the dispersion of relative price increases with an increase in deviation of inflation from a certain threshold rate in either direction but not with inflation per se, as is traditionally believed. The crucial inference that emerges from the empirical findings is the presence of a threshold inflation rate corresponding to which the dispersion of relative prices is minimised, and this threshold turns out to be 5%.
