How to Read the Consumer Price Index (CPI)

The CPI (Consumer Price Index) is a measure of how much the price of a "representative shopping basket" — a collection of the goods and services we usually buy — has changed over time.

Since you cannot track every single person's spending, the statistical authorities designate representative items that the public frequently buys and steadily track their prices. If the total price of this basket rose 3% from a year earlier, that is what "prices rose 3%" means.

What matters is that each item carries a different "weight." Because rent or transportation takes up a larger share of a household's budget than a stick of gum, price changes in large spending categories are reflected more heavily in the CPI.

In Korea, Statistics Korea publishes the CPI. Using 2020 as the base (100), it surveys the prices of 458 representative items, with weights following each item's average monthly consumption expenditure share from the Household Trend Survey. Representative items change with the times; in the latest revision, meal kits, masks, and electric vehicles were newly added, while items like briquettes and textbooks were removed.

In the U.S., the Bureau of Labor Statistics (BLS) produces the CPI. It tallies the prices of about 80,000 items, grouped into more than 200 detailed categories and 8 major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other). Of these, housing has the largest weight at about 41%, followed by transportation at about 16.8%.

CPI-related figures usually come in two forms.

Year-over-year (YoY) is the rate of increase compared with the same month a year earlier. The "prices up 3%" in news headlines is mostly this.

Month-over-month (MoM) is the change compared with the immediately prior month. It is useful for seeing whether the recent pace of prices is steepening or easing.

One more thing: a lower inflation rate does not mean prices have fallen. Even if the rate of increase drops from 3% to 2%, prices themselves are still rising; only the speed has slowed. This is different from "deflation," where prices actually fall.

The CPI is a measure that tells you "how much the purchasing power of my money has been eroded." If prices rise 3% every year, the value of money simply held in cash falls by that much.

So when you look at investment returns, you must also look at the "real return," obtained by subtracting the inflation rate from the nominal return. If a deposit pays 3% interest but prices rose 3%, your account balance grew, but the amount of goods you can actually buy stayed the same.

The CPI is not a tool for predicting future prices. But as a benchmark for checking whether your saving and investing are beating the "invisible tax" of inflation, it is very useful.