[The Editors' Verdict] Calculate the Consumer Price Index Accurately

Prices are soaring. After the outbreak of COVID-19, growth and inflation were low in most countries last year. However, with the arrival of vaccines and the proper recovery of economic growth in several countries, prices are rising quite rapidly. In the United States, the economic growth rate is in the mid-6% range, and the inflation rate is also in the mid-5% range. South Korea is also expecting an economic growth rate of 4% this year, and the inflation rate forecast has recently risen to the 2% range.

South Korea's Consumer Price Index (CPI) covers 460 items, calculated based on the monthly average consumer expenditure share using 2015 as the base year with an index of 100, and expressed per thousand units. The sub-indices within the CPI are also rising accordingly. This year, the CPI has shown a year-on-year increase of 2.6% every month since May, except for June which recorded 2.4%. In particular, agricultural, livestock, and fishery products have exceeded a 10% year-on-year increase since May but dropped to 7.8% in August. Vegetables surged by 28.6% in August last year due to the COVID-19 impact but decreased by 11.6% in August this year due to the base effect. On the other hand, fruits increased by 27.3% in August this year. Most of these are supply issues. Since the outbreak of COVID-19 last year, it has been difficult to properly cultivate fresh food. Foreign workers had difficulty entering the country, leading to labor shortages. These fresh foods are also hard to stockpile, so prices inevitably rise, and imports must be expanded. In reality, due to inflation, even buying a few pieces of fruit at the market costs tens of thousands of won, making it difficult to afford.

Among services, the most noticeable are jeonse and monthly rent. Jeonse rose by 2.2% year-on-year in August, and monthly rent increased by 0.9%. Those looking at the table might wonder why, despite the nationwide housing prices rising so much, the year-on-year increase of 1.6% seems quite small. This is understandable. Most jeonse contracts are renewed once every two years or can be extended longer by exercising the contract renewal right.

Besides jeonse and monthly rent, there is an index called the owner-occupied housing cost index. This estimates the expected cost if one were to rent a house similar to the one they own. The owner-occupied housing cost increased by only 1.6% year-on-year in August this year, but it is quite difficult to trust this figure in terms of statistical accuracy and sample size. As the sample size for housing prices has increased recently, housing prices have sometimes nearly doubled compared to the statistical figures.

Of course, reflecting this across all 460 items would cause the CPI to become highly volatile. Even so, there is a need to properly investigate or utilize other data. In the United States, housing is recognized as a commodity and accounts for about 20% of the CPI, but in South Korea, although housing is excluded from the overall CPI or a separate index is created, proper statistical figures are not being reflected.

If South Korea were to calculate its CPI by reflecting the housing price increase rate with a 20% weight as in the United States, the average CPI could rise by 1 to 2 percentage points. In that case, the price level in South Korea could be expected to be around 4%.

These days, most people do not trust the CPI shown on TV. The perceived inflation is much higher, and housing prices have actually risen significantly. The CPI is one of the indicators measuring people's livelihoods. If such figures are not properly calculated, it affects various economic and financial policies, and the public loses trust in the statistics, which then lose their meaning and fail to properly reflect the state of people's livelihoods.

Kim Sang-bong, Professor of Economics, Hansung University