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

Mr. Nguyen Duc Do

How do you assess and forecast the CPI and inflation trends in the first and second halves of 2024?

In reality, inflationary pressures this year are not too significant. The current high levels of year-over-year inflation and average inflation are mainly due to the impacts of healthcare and education price adjustments in Q3/2023. Therefore, in Q3/2024, as the effects of these price adjustments decrease, year-over-year inflation will significantly drop, and average inflation will also decrease if there are no large-scale price adjustments for state-controlled commodities.

Moreover, looking at the CPI increase rate in the first 6 months of 2024, it is evident that inflation pressure is moderate. Specifically, compared to the end of 2023, the CPI has only increased by 1.4%, averaging about 0.23%/month. Considering Q2/2024 alone, the CPI only increased by an average of 0.1%/month. These are moderate levels compared to the past five years.

The reason for the low inflation is that although the economy is recovering with a GDP growth rate of 6.42% in the first 6 months of 2024, and is forecasted to possibly reach 6.5% for the whole year, considering the period from 2020-2024, GDP has only increased by an average of about 5%/year - lower than the average 6.1% from the 2014-2024 period. This means the economy in 2024 is still operating below potential. Furthermore, the consumption growth rate during the 2020-2024 period has always been significantly lower than the GDP growth rate, about 3.9%/year, indicating that consumer demand is still weak. In this context, businesses are more concerned with selling goods than increasing prices.

In the monetary market, although the exchange rate has risen sharply in the first 6 months compared to the end of the previous year, increasing by more than 5%, since April 2024, the exchange rate has been relatively stable. Hence, the forecast is that the exchange rate will stabilize or even decrease in the last 6 months when the Federal Reserve (FED) lowers interest rates 1-2 times, and the USD may depreciate on the international market. Interest rates, although low, are still maintained at a real positive level and help curb inflation, while money supply and credit growth have been low in the first 6 months of 2024.

The above analyses show that there are not many factors causing sudden price increases in the last 6 months of 2024, so the rate of price increases in the last 6 months can be expected to be comparable to that in the first 6 months of 2024. Overall, if there are no large-scale service price adjustments, the average inflation for the entire year 2024 is forecasted to be around 3.4% (/-0.2%).

Many are concerned about economic fluctuations, wage increases, and other factors. How do you think these issues will impact price management?

The market still has many unpredictable factors. For example, the variable regarding imports and exports: if the US economy falls into recession in the last 6 months, then as early as Q3 or Q4, the Vietnamese economy could be significantly affected, especially issues related to exchange rates, interest rates, oil prices, and investment.

However, the domestic economy still has many favorable factors. Among them, the continuation of the National Assembly's agreement to reduce the value-added tax by 2% for some commodities until the end of 2024 also brings many expectations. For businesses, tax reduction is always a positive factor in a challenging business environment, and the rate of public investment disbursement is not high. Prioritizing tax reduction is a correct policy, helping to create more trust and resources for private enterprises. But tax reduction needs to balance between the State and private sectors, as budget resources are limit ed. If taxes are reduced too aggressively, the budget will be impacted, especially in terms of public investment activities.

Regarding the issue of basic wage increases, the adjustment of increasing the salary by 30% from 1/7 mainly occurs in the public sector, which does not have a large scale in the economy (accounting for less than 8% of the workforce). Therefore, the impacts of wage increases on inflation and the CPI index in the coming time will not be too significant. Moreover, there have been many wage increases in previous years, but the impact on inflation was not significant.

How can more effective control over the trend of price increases according to wages be achieved?

With tens of thousands of commodities in the market, the regulatory agency cannot go and control each commodity. However, the state regulatory agency should only control macro aspects, such as the money supply, exchange rates that affect inflation variables. It cannot rely on perceptions in one place, one commodity to assess price increases because prices at this market have increased does not necessarily mean they have increased at another market. Prices in Hanoi may have increased but not necessarily in other provinces. Or many commodities increase prices seasonally, especially during festive seasons and Tet, etc. Therefore, assessments need to rely on overall numbers.

I believe that if there is an increase in price management, it is still within the government's control.

Thank you!