A rapid increase in the rate of inflation is sometimes attributed to the "base effect". What is "base effect”?

The correct answer is C. Inflation is measured as the percentage change in a price index over the same month of the previous year. So the 'base' is the price level of the corresponding period last year. If prices were unusually low or had fallen in that base period, even a modest rise in prices this year produces a sharp jump in the reported inflation rate. This statistical effect is the base effect, and it can make inflation look sudden without any real change in demand or supply.

• A is wrong. A supply shock, such as crop failure pushing up food prices, is a real change in supply conditions. It is not a calculation artefact, even though it can also raise inflation quickly.
• B is wrong. Demand surge due to rapid growth is demand-pull inflation, an economic cause rather than a measurement effect.
• D is wrong because C correctly defines the base effect.

The concept sits in the Economy section under inflation measurement and monetary policy. For Mains, it helps explain why the RBI looks at the trend and not just the headline print, and why CPI and WPI movements need careful reading. Base revisions of CPI and WPI have also changed the baseline, but the mechanism is the same.

Trap: aspirants confuse the base effect with a supply shock because a sudden inflation spike is often blamed on food. The base effect is about the reference year's price level in the calculation, not about what caused prices to rise.