A base year is set which is assigned a value of Price Index=100. Now on the basis of rise and fall in price index as compared to the base year, inflation is calculated.
For example, considering the price index in 2001(base year) was 100 and the index rose to 110 in 2002 so the inflation rate becomes 10% .Now in 2003 price index was 120,so as per the base year the inflation rate becomes 20% but the inflation rise is 9.09% compared to previous year.
The drawback with this is that it makes the inflation look too high or too low even if the price index rise has been same as the base changes.
if the price index had risen at a higher rate in the corresponding period of the base year showing a high inflation rate, an exact same increase in the price index now will show a lower inflation rate.