Wary of imported inflation risks

Kis Vietnam estimated that a 1% increase in gasoline prices would cause the traffic index to increase by 0.37%, contributing 3.6bps to inflation.

Global volatility's impact

Because of the link between domestic commodities markets and the rest of the world, the Vietnam consumer price index (CPI) is under pressure from global development. However, the nature and reason of Vietnam's CPI differ significantly from that of Western countries, most notably the United States.

U.S. inflation is attributable to the supply bottleneck and the pent-up demand resulting from COVID-19 and supportive fiscal and monetary policies. Even during the COVID-19 pandemic, the United States' national income per capita increased by 6.13% year on year in 2020 and 7.24% year on year in 2021 when the government provided financial assistance to impacted employees through a variety of programs. A healthy financial condition strengthens the buying power of U.S. consumers, resulting in strong domestic demand.

Vietnam's inflation is different because national income per capita was reduced by 1.06% YoY in 2020 and was seemingly unchanged in 2021 under the COVID-19 impact and the lack of financial aid. According to GSO, the average monthly income of Vietnamese workers reached VND5.70 million per month in 2021, down 0.5% compared to 2020. Due to the more severe COVID-19 impact, income losses in the industrial and construction (I&C) and service sectors were notably substantial, with declines of 3.0 percent YoY and 0.4 percent YoY, respectively. As a result, Vietnamese consumers are more careful in their purchasing decisions than their counterparts in the United States.

The U.S.'s widespread and long-lasting inflation was evident not only in energy items but also in others, such as food, rent, and used vehicles. On the other hand, Vietnam's inflation, in 2021 and the early months of 2022, just concentrated on the traffic index which was primarily constituted by inherently global-sensitive gasoline prices and transportation costs. The food and foodstuff (F&Fs) and housing indices witnessed limit  ed increases, mainly attributed to the Tet season and fading later.

Given the high import values of consumer goods, fuels, and raw materials, the global commodity surge could translate into Vietnam's inflation through two popular channels: consumption and production.

Direct impact of global energy prices

Because of the measurement approach in calculating retail prices of several energy commodities, Vietnam’s economy imported inflation through the linkage between global gasoline prices and domestic ones. According to the former leader of GSO, gasoline accounts for 1.50% of household spending, meaning that an increase of 1% in gasoline prices would directly contribute 1.5 basis points (bps) to CPI. However, the impact of gasoline on CPI was greater because of the indirect impact on transportation costs, which were highly sensitive to the movement of gasoline prices. Kis Vietnam estimated that a 1% increase in gasoline prices would cause the traffic index to increase by 0.37%, contributing 3.6bps to inflation.

In Kis Vietnam’s scenario, if the Brent price remained unchanged to 2022-end at USD110.68 per barrel (the close price on March 14th, 2022), implying an increase of 60.94%, Vietnam’s traffic index would increase by 18.02% YoY and contribute 1.74 percent points (ppts) to inflation. Given that the total contribution of other items in 2015-2021 was an average of around 2.70 ppts, inflation could reach 4.44% in 2022.

Response to the price surge

Given the cost-push phenomenon, fiscal policies to mitigate the rising cost of production seem to be more feasible than others in the monetary framework. Although the impact of energy prices on domestic CPI was strong, the regulatory mechanism for mitigating the impact of external shocks on domestic inflation was specific and long-standing. Accordingly, the petroleum stabilization fund was effective in reducing extreme movement. Although Russia-Ukraine tension was an unforeseen externality, stabilization funds and other measures related to the state budget (proposed environmental tax reduction) helped reduce upward pressure on CPI.

Regarding Kis Vietnam’s above-mentioned analysis, the current Brent price of around USD110 per barrel could create upward pressure on the traffic index and increase the possibility that inflation could exceed the 2022 government target of 4%. "The government would manage to delay price increases in several goods and services, such as electricity, education, and healthcare, to temporarily offset the adverse effect of the global commodity price surge. Furthermore, measures to ensure production in the AFF sector would be considered to stabilize food and foodstuff prices", Kis Vietnam said.