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The government has found an easy way to curb inflation ― to change the way of calculating the consumer price index.
Statistics Korea said Tuesday that it had updated the composition and weights of the goods and services used to produce the CPI, a job it does once every five years to ensure that the key measure of inflation reflects price trends more accurately.
The change magically brought down the nation’s CPI rise in the first 10 months of the year by 0.4 percentage points. Before the revision, the index rose 4.4 percent on year to October. After the overhaul, it dropped to 4 percent. As a result, the CPI increase for the whole of the year is expected to stay below 4 percent, the upper limit of the target range.
The statistics office asserts that the significant drop in inflation following the index overhaul was just a coincidence. Yet who would take its word at face value? We strongly suspect the Ministry of Strategy and Finance influenced the office’s decision.
The office removed gold rings from the inflation basket in the process of reducing the number of the items comprising the basket from 489 to 481. The exclusion of gold rings alone knocked 0.27 percentage point off the CPI rise.
In August, a 29 percent jump in the gold ring prices pushed Korea’s inflation past 5 percent. This led Finance Minister Bahk Jae-wan to suggest last month that the government would take out gold rings because “many people no longer buy them as they are expensive.”
In place of gold rings, the office introduced accessories made from less than 14-karat gold, which boosted inflation by a mere 0.02 percentage point.
The office also adjusted the weight of rice from 14 to 6.2 on the grounds that per capita rice consumption has dropped. This also helped lower inflation as rice prices rose sharply this year.
The prospect that inflation would stay below 4 percent this year will enable the Bank of Korea to breathe a sigh of relief, since it has been criticized for its failure to keep inflation within the target range.
But bringing down the inflation figure by massaging the figures will not really stabilize prices. Price stability is best attained through judicious monetary policy. But the central bank has failed to adjust its key policy rate many times this year, letting the inflation genie out of the bottle. The bank needs to act more decisively to combat inflation.
Statistics Korea said Tuesday that it had updated the composition and weights of the goods and services used to produce the CPI, a job it does once every five years to ensure that the key measure of inflation reflects price trends more accurately.
The change magically brought down the nation’s CPI rise in the first 10 months of the year by 0.4 percentage points. Before the revision, the index rose 4.4 percent on year to October. After the overhaul, it dropped to 4 percent. As a result, the CPI increase for the whole of the year is expected to stay below 4 percent, the upper limit of the target range.
The statistics office asserts that the significant drop in inflation following the index overhaul was just a coincidence. Yet who would take its word at face value? We strongly suspect the Ministry of Strategy and Finance influenced the office’s decision.
The office removed gold rings from the inflation basket in the process of reducing the number of the items comprising the basket from 489 to 481. The exclusion of gold rings alone knocked 0.27 percentage point off the CPI rise.
In August, a 29 percent jump in the gold ring prices pushed Korea’s inflation past 5 percent. This led Finance Minister Bahk Jae-wan to suggest last month that the government would take out gold rings because “many people no longer buy them as they are expensive.”
In place of gold rings, the office introduced accessories made from less than 14-karat gold, which boosted inflation by a mere 0.02 percentage point.
The office also adjusted the weight of rice from 14 to 6.2 on the grounds that per capita rice consumption has dropped. This also helped lower inflation as rice prices rose sharply this year.
The prospect that inflation would stay below 4 percent this year will enable the Bank of Korea to breathe a sigh of relief, since it has been criticized for its failure to keep inflation within the target range.
But bringing down the inflation figure by massaging the figures will not really stabilize prices. Price stability is best attained through judicious monetary policy. But the central bank has failed to adjust its key policy rate many times this year, letting the inflation genie out of the bottle. The bank needs to act more decisively to combat inflation.
