Prices up 2%: what happens to cash in a drawer?

Prices rising 2% means a basket of groceries that cost 1,000,000 won last year costs 1,020,000 won this year. The 1 million won in your drawer hasn't changed, so you can't fill the same basket and come up about 20,000 won short. Economists call the amount money can buy its purchasing power.

This gap builds up every year. After 10 years at 2%, the same basket costs about 1.22 million won, and 1 million won covers only about 82% of it. After roughly 35 years, prices double and purchasing power is cut in half. Dividing 72 by the inflation rate gives a rough number of years for prices to double, and 72÷2=36 comes very close to the exact calculation.

First, a 2% rise in prices doesn't mean every item went up by 2%. The consumer price index published by the government averages price changes across hundreds of items people buy often, weighted by how much they spend on each. So some items, like vegetables or fuel, jump sharply while others actually get cheaper, and depending on what you buy most, the inflation you feel can differ from the official number.

Second, prices rising a little isn't necessarily a bad sign. The Bank of Korea aims for 2% consumer price inflation so that prices neither rise too fast nor fall. If prices keep falling, people may put off spending and the economy can freeze up.

Looking at prices alongside your bank interest makes things easier to understand. If your interest is 3% a year and prices rose 2%, your real gain in purchasing power is roughly 1%. If the interest is lower than inflation, the number grows but what you can buy shrinks.

The same goes for setting a goal for money you'll save for a long time. If you plan to buy something that costs 3 million won 10 years from now, its price will likely have risen with inflation by then. Setting your goal at today's price plus a bit of inflation means less chance of being caught short later.