Prospects for Vietnam inflation in 2024

>> Determine tools, policy for inflation control

CPI in June was primarily driven by a 14% year-on-year increase in hog meat prices due to a supply shortfall caused by the outbreak of African swine fever last year. Rising power and oil prices also contributed to the increase in CPI. In the first half of 2024, CPI rose by an average of 4.08% year on year, while core inflation rose by 2.7%. Concerns over inflation have grown since the beginning of 2024, as the CPI growth rate has steadily increased, bringing it closer to the government's objective of 4.5%.

This month, food and catering services (4.7% year on year) contributed the most to the rise in total CPI, owing to a significant uptick in the food basket, which increased by 14.7% year on year. In addition, the housing and building materials group index increased 5.6% year on year, owing to a rise in residential power prices at the peak of the summer. Transportation costs are also rising by 3.03% year on year, while domestic fuel prices have risen by 2.13%. Furthermore, tuition fee increases in several regions boosted the education group index by 8.01% year on year. Finally, the medication and healthcare services category gained 8.04% year on year as adjusted healthcare service costs helped to slow the CPI upswing.

For 1H24, the average CPI was significantly impacted by increases in cement and sand prices, which, together with growing input material prices and high rental costs, lifted the price index, driving the average price index of the housing and building materials group up by 5.5% year on year.

Furthermore, tuition fee hikes in certain cities resulted in an 8.6% year-on-year increase in the education group index, followed by growth in the average CPI. In contrast, the postal and telecoms group's price index declined 1.2% year on year in June 2024, as older generation phone costs fell, restricting the rate of growth in the average CPI.

MBS anticipated that a likely rise in CPI in the second half of the year would raise the average CPI for 2024 to 4.3%, which is near the government's target of 4.5%. Despite the fact that domestic demand remains low, inflation in the second half of 2024 will be in danger due to the following factors:

First, domestic construction steel prices are predicted to rebound to 15 million VND/ton (8% year on year) in 2024, driven by rising global steel prices and local market demand.

Second, when the exchange rate continues to rise, the cost of imported items will increase.

>> The impact of wage increases on inflation will not be too significant

Third, the basic pay increase, which will take effect on July 1, may have an influence on domestic inflation. Furthermore, it maintains its projection that oil prices in 2024 would fluctuate within a tight range of roughly 85 USD/barrel, as OPEC has chosen to extend production cuts until the end of Q3/2024, which is higher than the average oil price in the second half of 2023.

Assoc. Prof. Dr. Vu Duy Nguyen, Director of the Institute of Economics and Finance, presented two scenarios for Vietnam's inflation in 2024.

For scenario 1, the average CPI is about 3.95% (0.25%), with the assumption that GDP growth would be 6–6.5% and that there would be no abnormal geopolitical or oil price fluctuations in the world.

In scenario 2, the average CPI is about 3.95% (-0.25%), with the assumption that the GDP growth objective is less than 6% and that there are no abnormal geopolitical or oil price fluctuations around the globe.

To ensure that the average CPI objectives of 4 to 4.5 percent in 2024 are met, Assoc. Prof. Dr. Vu Duy Nguyen stated that a monetary easing policy must continue. However, the SBV should maintain correct and effective credit growth when directing capital toward production and consumption in order to assure entire supply output and company efficiency, as well as to raise overall demand through personal spending.

Furthermore, it is necessary to stabilize the gold, foreign exchange, and currency markets in light of Vietnam's monetary policy easing, which differs from the monetary policy trends of many other countries around the world, while preparing for an effective response to the possibility that major countries' central banks will cut rates.