[The Pitfalls of Statistics]⑤ Price Slowdown? Not Felt... Historically, Price Drops Occurred Only Twice

Last Year's Annual Increase Rate of Dining Out Expenses 7.7%
Exceeding Annual Consumer Price Inflation Rate of 5.1%

"Sigh, the kids' snack expenses are as much as their meal costs. I've cut back on everything."

In her 30s, Park Ji-young feels anxious every time she goes grocery shopping. She used to enjoy shopping at large supermarkets on weekends with her 5- and 7-year-old children as a kind of outing, but this year, with prices soaring sharply, she finds herself constantly removing snacks her kids put into the shopping cart. The price of bread, which her children like, rose by 11.5% in June this year compared to the same month last year, and snacks also surged by 10.5%. Since her growing children quickly outgrow their clothes, the price of children's clothing also skyrocketed by 13.7% compared to the same month last year. Milk, an essential snack item, also increased by 9%. Park said, "They say inflation has slowed down, but as a mother raising two kids, I don't feel that at all," adding, "It's already tight to buy snacks for the kids, so who can raise two children with peace of mind?"

Only petroleum prices fell... Inflation bending our backs

Although the consumer price index (CPI) in June dropped to the 2% range for the first time in 21 months, consumers continue to complain that it is hard to feel the difference. The price of petroleum products, which had been the main driver of inflation, fell by 25.4% compared to a year ago, marking the largest decline since January 1985, pulling down the overall inflation rate. However, prices of items excluding petroleum products are still soaring. Electricity, gas, and water prices rose by 25.9% compared to the same month last year due to electricity rate hikes and other factors. Although the base effect of the sharp drop in petroleum prices has led to a clear slowdown in the CPI, the gap between the official inflation rate and the perceived inflation rate is widening.

Especially, the rapidly rising dining-out costs since last year further increase the perceived inflation. Although international oil prices, which surged after the outbreak of the Russia-Ukraine war last year, have gradually stabilized, and prices of livestock products, which had further increased grocery prices, fell by 4.9% this month, dining-out prices rose by 6.3%, continuing their upward trend. The annual increase rate of dining-out costs last year was 7.7%, significantly exceeding the annual CPI increase rate of 5.1%, and the cumulative increase rate of dining-out costs up to June this year has already reached 7.2%. Personal services excluding dining-out also rose by 4.1% compared to the same month last year, fueling inflation.

Bathing fees increased by 14.2%, adding to the burden on ordinary people, and insurance service fees (13%), taxi fares (9.5%), and workplace cafeteria meal costs (8.2%) are also on the rise. While petroleum and agricultural, livestock, and fishery product prices fluctuate depending on circumstances, prices of personal services such as dining-out tend not to fall once they rise, increasing the financial burden on consumers. An official from Statistics Korea explained, "Although the increase rate of personal services is slowing down, it still exceeds the consumer price inflation rate," adding, "The slowdown in the rise of services like dining-out reflects the perception that prices have already risen as much as they can, and compared to the past, the level is still high."

Perceived inflation varies greatly depending on frequently purchased goods

There is a reason for the widening gap between the official consumer price index and perceived inflation. The CPI does not survey prices of all products. Instead, it selects 458 items that account for a large share of household consumption expenditure, assigns weights to each item, and averages them to create the index. On the other hand, perceived inflation is the subjective feeling of price changes for frequently purchased items by each household. If households mainly consume different products, their perceived inflation will inevitably differ. For example, households that enjoy domestic beef and imported beef might feel that inflation has eased as prices of these items fell by 5.1% and 8.0%, respectively, in June compared to the same month last year. However, households like Park's, which mainly buy snacks for children, experience a situation where they do not feel any slowdown in inflation because those items have surged. A Bank of Korea official said, "Consumers judge current prices by comparing them to the last time they bought a product or to a relatively cheaper time, so they may feel that the current CPI does not reflect perceived inflation."

There are also limitations in how the price index is compiled. The CPI incorporates changes in items mainly consumed by consumers and changes in expenditure amounts per item through a regular revision every five years. The current base year for the index is 2020. Considering that this year is three years after the base year and that the COVID-19 pandemic caused some changes in consumption expenditure patterns, the gap between official inflation and perceived inflation may feel even larger.

If the difference between the CPI and perceived inflation feels significant, auxiliary indicators such as the 'Living Cost Index' and the 'Fresh Food Index' can be used. Statistics Korea provides the 'Living Cost Index,' which is compiled from 144 items that are frequently purchased and have a high expenditure share, making consumers sensitive to price changes. The Living Cost Index in June rose by 2.3% compared to the same month last year, and the Fresh Food Index, covering 55 items such as vegetables, fruits, and fish, also increased by 3.7% compared to the same month last year.

An official from Statistics Korea said, "When consumers hear that inflation has slowed, they tend to think prices are falling, but to be precise, it means the inflation rate is decreasing while prices continue to rise," adding, "Since the statistics were first compiled in 1965 (with year-over-year inflation rates tracked since 1966), the inflation rate has only recorded negative year-over-year growth twice: in September 2019 (-0.4%) and May 2020 (-0.2%), both times due to a sharp drop in international oil prices."