A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is “base effect”?
[UPSC Civil Services Exam – 2011 Prelims]
(a) It is the impact of drastic deficiency in supply due to 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 previous year on the calculation of inflation rate
(d) None of the statements (a), (b) and (c) given above is correct in this context
The base effect refers to the impact of the rise in the price level (i.e. last year’s inflation) in the previous year over the corresponding rise in price levels in the current year (i.e., current inflation).