Infaltion:The Magic of Base Effect

By | November 3, 2008

Yet another logical and mathematical fiction which actually needs lots of calculations which some economist may come out in the future with a detailed report on .
I have taken a simplistic view!! Whereas its one of the complicated calculations. If there is something wrong people can please bring it to my notice.

INFLATION:
In simpler words Inflation rate is the % rise in prices corresponding to the same week in previous year.
Lets see a simple example of how this calculation works .
First an index is taken by giving different weightage to different commodities etc.

Simple example with Base effect implications:

Week1 – 07= 200
Week2 -07= 195

Week1- 08 = 224
Inflation Week1- 08 = 224-200 / 200 = 12 % .

Week2- 08 =224

Inflation Week2-08= 224-195/195 = 14.87 % .

This in turn leads to a higher spurt in inflation even though when the Index has not moved.

Now taking the next scenario.

Week1-08 = 224.
Week2-08= 228.

Week1-09 = 250.

Inflation = 11.61 %

Week2-09 = 250.

Inflation = 9.65 % .

This scenario will lead to a quick drop in inflation although when the index doesnt fall.

NOW WHY ARE WE DISCUSSING SUCH Mathematics and calculations. Lets c why.

For last many months we have seen inflation zoom away coz of the price moves in commodities which was also accentuated by the lower base last year. Also crude oil impact lead to the next jump in inflation. This impact of lower base can stay for another couple of weeks or months is a guess.

Now in the current period of 8-13 % inflation in the period of March – September or even later it may happen that its creating a higher base for the INDEX.

So in the mid of next year onwards this impact could slowly start coming into play if prices just remain stable !!!!. Also if commodities and index constituents take a good drop inflation could also plummet quickly. !!! Also lot of monetary actions are being taken and Rupee is at lows a bounce in it in coming months could also effect.

One needs to see exact values for particular periods to know about which periods would see major impacts.
If possible will try to gather exact data and calculate which would be a difficult task but the simple mathematical logic seems much more easier n effective although how big an impact it can be needs calculation.

Well as a matter of fact such a BASE effect in Year on Year results may also make lot of results next year to be more better then they are.

Example:
Q2- 07 – profits = 100 crores
Q2-08 profits = 60 crores.

Drop of 40 % in profits Q-o-Q .
Q2-09 profits = 90 crores .

Q-0-Q growth now is 50 % . Which would still be lower then the best times of 100 crores.

One thought on “Infaltion:The Magic of Base Effect”

1. Manjunath

Very good explaination Bramesh…. I found these inflation related jargons very complicated and never went to read much about them.. In fact i read urs thinking i will drop it after reading few lines but had to finish till the end bcoz u have made it so simple…Now i will regularly visit ur blog… keep up the good job…