Addressing price misconceptions
The author is an industry 1 team reporterof the JoongAng Ilbo.
In the digital age of metaverse, the consumer price index (CPI) remains in the analog domain. The survey staff of Statistics Korea select 25,000 retailers nationwide, including department stores, supermarkets and traditional markets, as samples and either personally visit them or make calls to collect price information. It takes a lot of time and budget to survey prices.
The surveyors investigate the prices of representative goods and services. As of 2015, the list included 460 items.
Price collection is conducted in a designated period every month. As prices of agricultural, livestock and fisheries and petroleum products fluctuate greatly, they are surveyed three times a month and averaged out. The price is based on the actual transaction price that consumers paid, and hence, includes taxes, such as VAT. The survey items are selected every five years to reflect the situation of the times. Statistics Korea drafted a revised plan for the consumer price index in July 2020. Fourteen items have been added to the list of consumer price index base items, including cherries, face masks, probiotics, dishwashers and rice noodles. Masks have been added due to the Covid-19 pandemic. Instead, briquettes, printers, ties, suits and school meals have been excluded from the list, as well as cameras, which have been nearly completely replaced by smartphones. Statistics Korea will release the revised plan on Dec. 22.
As the CPI is based on sample surveys, it is different from actual prices. Countries have different survey items, so the index varies among countries. In October, Korea’s CPI rose by 3.2 percent compared to the same month of the previous year. In the same period, the index increased 6.2 percent in the U.S. compared to the same month of the previous year, the largest surge in 31 years since December 1990.
The illusion of the prices in Korea and the U.S. is due to housing prices. In America, cost for housing ownership is surveyed and reflected in the CPI, while in Korea, only monthly rent and jeonse (long-term deposit-based rent) prices are included. The housing ownership price refers to the expenses of owning a home, such as mortgage interest payment and tax. If the housing ownership price is included in the survey as in the U.S. and Japan, some predict Korea’s CPI could be in the 4 to 5 percent range.
There are voices within the Bank of Korea that say housing ownership cost should be on the list. It is about time we seriously consider ways to reduce price illusion.