The compaction grouting (CPG) method is relatively a new ground improvement technique for mitigating the liquefaction problem. In this technique, a stiff mortar is injected under high pressure that displaces and compacts the surrounding soil. Though the application of the method has been mainly dependent on the field tests, practical experience and empiricism, the compactive mechanism of CPG is not well understood. The objective of the present study is to bring out its compactive mechanism in its densification and confining effect. This paper presents an analytical solution for the process of CPG simulating it as an expansion of a cylindrical cavity in a finite medium. Effect of CPG is quantified as an increase in lateral earth pressure at any stage of applied injection pressure normalized with initial hydrostatic pressure and in terms of a densification factor. Predictions are made to reveal the behavior of CPG-treated soil in three states of density, namely as comparatively loose, medium and dense. Design charts are developed for liquefaction resistance parameter of CPG, RCPG, based on the present model of cavity expansion theory. It has been found that the design methods for CPG-improved ground should account for the coefficient of earth pressure at rest.