The base effect
relates to inflation
in the corresponding period of the previous year
, if the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Price Index
will arithmetically give a high rate of inflation now. On the other hand, if the price index had risen at a high rate in the corresponding period of the previous year and recorded high inflation rate, a similar absolute increase in the price index now will show a lower inflation rate now.
An example of the base effect:
The Price Index is 100, 150, and 200 in each of three consecutive periods, called 1, 2, and 3, respectively. The increase of 50 from period 1 to period 2 gives a percentage increase of 50%, but the increase from period 2 to period 3, despite being the same as the previous increase in absolute terms, gives a percentage increase of only 33.33%. This is due to the relatively large difference in the bases on which the percentages are calculated (100 vs 150).
Last edited on 31 March 2021, at 01:42
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