Q. With reference to Base effect in economy, which of the following is / are correct statements?

1. Base effect helps to make accurate long term assessment of inflation
2. Base effect diminishes over time when the inflation levels are relatively unchanging

Select the correct answer from the codes given below:
Answer: Only 2
Notes: Base effect distorts monthly inflation figures due to unusually high or low inflation in the same month of the previous year. A low inflation rate in the prior year can cause a small price index increase to result in a high current inflation rate. Conversely, a high prior inflation rate means a similar current price index increase will show a low inflation rate. This makes long-term inflation assessment difficult. The effect diminishes over time with stable inflation levels.