Which of the following statements is/are correct? 1. A price index captures the change in the average price of a constant basket of commodities. 2. If the price index takes values 100, 110 and 121 in three consecutive years respectively, then the inflation rates in the 2nd and 3rd years are 10% and 21% respectively.

Statement 1 is correct: a price index such as the CPI or WPI tracks the average price change of a fixed (constant) basket of commodities over time relative to a base year. Statement 2 is incorrect because inflation in any given year is calculated as the percentage change in the index from the previous year, not from the base year. From 100 to 110 gives 10% inflation in year 2, and from 110 to 121 gives (121−110)/110 × 100 = 10% inflation in year 3 (not 21%). Hence only statement 1 is correct.