The importance of understanding the ‘base effect’. July 31, 2026

The Motley Fool Money hosts Andrew Page and Ryan (back from a five-week holiday in Far North Queensland) kick off their return episode by weaving together a handful of connected economic and investing threads. The throughline is the base effect — the idea that the reference point you use to measure change dramatically alters your perception of reality. This principle applies to inflation data, stock price charts, property valuations, and even the AI revolution. The hosts use it as a lens to examine why the economy feels worse than the headline numbers suggest, why property investing has become a faith-based exercise, and how investors should think about the long game.

Inflation’s Hidden Ratchet and the Base Effect

The headline inflation figure fell from 4% to 3.8%, with the underlying rate steady at 3.6%. The hosts stress that a “fall” in the rate of inflation does not mean prices are dropping — it means prices are still rising, just slightly less quickly. Ryan makes the point plainly: “Prices still went up.” Over time, this compounding is brutal. At 3.8% annual inflation, purchasing power halves in about 17 years. The hosts note that this is roughly 40% of the average long-term equity return (around 10%) getting eaten before you even start.