The **base effect**^{1} 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).

Original source: base effect. Shared with Creative Commons Attribution-ShareAlike 3.0 License

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