gs1medium
A rapid increase in the rate of inflation is sometimes attributed to the "base effect". What is "base effect"?
- A.It is the impact of drastic deficiency in supply due to the failure of crops.
- B.It is the impact of the surge in demand due to rapid economic growth.
- C.It is the impact of the price levels of the previous year on the calculation of inflation rate.
- D.None of the statements, A, B and C, given above is correct in this context.
▶ Answer & Explanation
Correct answer: C. It is the impact of the price levels of the previous year on the calculation of inflation rate.
The base effect refers to the phenomenon where the year-on-year inflation rate calculation is influenced by the price level of the corresponding period in the previous year. If the previous year's prices were very low, even a moderate increase in current prices can lead to a high inflation rate. Conversely, if the previous year's prices were very high, the current inflation rate might appear lower even with significant price rises.
Source: UPSC gs1 2011