Q. Which one of the following best depicts the effect of a ‘high base effect’ on inflation measurement?

[A] Inflation remains constant despite a significant drop in commodity prices.

[B] Inflation appears lower because the previous year experienced hyperinflation.

[C] Inflation rises steadily over several years without any significant economic changes.

[D] Inflation is unaffected by changes in the base year price levels.

Answer: B
Notes:

Explanation – The base effect refers to the impact of the price levels in the previous year (the base year) on the calculation of the current year’s inflation rate. A high base effect occurs when the price levels in the base year were exceptionally high. When the base year had very high inflation or hyperinflation, even a relatively smaller increase in prices in the current year will result in a lower calculated inflation rate compared to the base year. This is because the base for comparison is already elevated due to the high inflation in the previous year.

Source: The Hindu

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