Wary of inflation pressures

Vietnam's consumer price index (CPI) increased by 2.4 percent year-on-year in March 2022. Photo: Quoc Tuan

Vietnam's consumer price index (CPI) increased by 2.4 percent year-on-year in March 2022, compared to 1.4 percent year-on-year in February 2022. This is the highest inflation rate in seven months, but it still falls far short of the 4.0 percent target. Rising global oil prices associated with the Ukraine conflict have caused gasoline prices to rise.and diesel prices increased by 13.4 percent (m/m) and 56.1 percent (year on year), respectively, due to rising global oil prices associated with the Ukraine conflict.They continued to be the principal contributor to inflation through raising transport prices. Food prices also ticked up after a muted 2021.

Core CPI inflation increased to 1.1 percent (y/y) in February from 0.7 percent (y/y) in February, reflecting recovering domestic demand and the transmission of higher transportation costs as well as higher prices of imported consumer and intermediate goods.

Meanwhile, the manufacturing producer price index increased by 3.8 percent (y/y), reflecting the rising cost of inputs, which increased by 5.5 percent (y/y) in Q1-2022. Although agricultural inputs increased by 9.1 percent year on year, the agriculture producer price index increased by only 0.6 percent year on year.

This disconnect could be attributed to the lower price of pigs, which fell by 26.3 percent year on year, due in part to plentiful supplies and in part to some producers selling off their herds as increased input costs made pig production unprofitable.As many agriculture and manufacturing inputs are imported, their higher prices reflect rising commodity and input prices in the world market.

Mr. Dinh Quang Hinh, VNDirect’s analyst, sees inflation risks on the upside due to the impact of the Russia-Ukraine crisis. The increase in prices of input materials such as coal, steel, copper, and aluminum could have an impact on production costs in Vietnam, while the increase in prices of fertilizers and agricultural commodities (wheat, corn, barley) can also put pressure on domestic food and foodstuff prices. However, he still believes that the government could control inflation in 2022 through reducing taxes to halt the increase in gasoline prices. In addition, the government is able to reduce the prices of essential goods and services, such as electricity, tuition fees, or medical service fees, to reduce inflationary pressure.

"Overall, VNDirect maintained its 2022 average CPI forecast at 3.45% yoy. Although inflationary pressures are expected to increase in the coming months, we still maintain our expectation that the State Bank of Vietnam (SBV) will maintain its accommodative monetary policy until at least the end-2Q22 to support economic recovery", Mr. Dinh Quang Hinh said.

WB, on the other hand, stated that while CPI increases have been subdued in 2021, owing in part to slack in aggregate demand, accumulated increases in intermediate and producer price indexes in the last three quarters could influence production decisions and translate into higher consumer prices, particularly food prices.

In the short run, targeted policy intervention to alleviate the impact of the price hikes on the general population, and especially on the most vulnerable, is recommended in WB’s opinion. The temporary petroleum tax reduction recently introduced by the authorities is one such short term measure, although perhaps the choice of reducing a specific environmental tax on petroleum may not reflect well on the environmental intentions of the authorities.

In the medium term, the WB said other measures would include a more targeted, effective, and responsive social protection system that would help build resilience to shocks in the economy. If price increases persist, the economy should be allowed to adjust to the price changes. Also, the authorities should consider structural reforms to help the economy become more productive and increase aggregate supply. These would include tax breaks for productive and innovative investments, reducing barriers to doing business and logistics costs, and investing in the education and technical training of the work force.