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Base effects

Distortions in a year-over-year growth rate caused by an unusual value in the year-ago comparison month rather than by anything happening now.

A year-over-year rate is a twelve-month chain. When a large print drops out of the window, the annual rate changes even if the current month is perfectly ordinary. Forecasters map this out in advance, so the path of base effects is known and should already be priced.

The defence is to look at three-month and six-month annualised rates alongside the annual number. If the short-window rates and the annual rate are telling different stories, the base is usually the reason.

Example: an index rose 0.9% twelve months ago and rises 0.2% this month. The year-over-year rate falls by roughly 0.7 points purely from the swap, with no change in current momentum.

Related: core-cpi, annualised-rate, disinflation, data-revision, core-pce

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