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Q13 (IAS/2011) Economy › Money, Banking & Inflation › Inflation measurement Answer Verified

A rapid increase in the rate of inflation is sometimes attribute to the “bass effect”. What is “base effect”?

Result
Your answer: —  ·  Correct: C
Explanation

The 'base effect' refers to the impact that the price levels of the previous year (the base period) have on the calculation of the current inflation rate [3]. Inflation is typically measured as a percentage change in a price index over a twelve-month period [2]. If the price index was abnormally low in the corresponding month of the previous year—perhaps due to a temporary slump in economic activity or a supply glut—even a moderate increase in current prices will result in a high percentage growth rate [3]. Conversely, a high price level in the base year can lead to a lower reported inflation rate in the current year, even if prices are still rising [1]. This phenomenon can cause volatility and distortion in headline inflation figures, making it difficult to assess underlying price trends without considering the starting point of the calculation [3].

Sources

  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > WHAT IS BASE YEAR OR BASE EFFECT? > p. 65
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > CHAPTER SUMMARY > p. 76
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