Is inflation decline temporary or a trend?

16-Jun-2017 Intellasia | Saigon Times | 6:00 AM Print This Post

The Consumer Price Index (CPI) is both an input indicator for the monetary policy management of the State Bank of Vietnam (SBV) and a measure of the quality of economic growth. It is because the Gross Domestic Product (GDP) growth target of 6.7 percent of the government in 2017 will only be meaningful when inflation is controlled at low level.

Thus, the fluctuations of CPI in the near future will play a decisive role in the success of the government’s economic governance.

Inflation falls after 20 consecutive months of increase

The CPI in May 2017 dropped by 0.53 percent compared to the previous month. This is the first reduction after a 20-month increase from September 2015. This result made the CPI in May 2017 to only 3.19 percent higher than May 216, and the average CPI of the first five months of 2017 to be 4.47 percent. If this trend continues in the near future, the target to control average CPI at below 4 percent of the government is entirely feasible.

The current question is whether this reduction of inflation is temporary or becoming a trend. To answer this question, it is necessary to first clarify the factors that have maintained the downward trend of inflation since early 2017.

Inflation falls due to both internal and external factors. The downtrend of inflation from the beginning of the year is fairly unexpected, contrary to the earlier forecasts of many economists, because after hitting the bottom of 0.63 percent in 2015, CPI continuously rose throughout 2016 and ended the year at 4.74 percent.

In 2017, the CPI is forecasted to face a number of unfavourable factors such as the upward movement of oil prices or the uptrend of the prices of basic commodities in the world, along with the plan to adjust prices of goods and services managed by the State such as health care, education, electricity, and domestic water, etc.

The recent downward trend of CPI is supported by both internal and external factors. The first internal factor is the volatility of the world oil prices. From the beginning of the year, the average oil price has been ranging around 53.7 USD per barrel, much lower than the levels of 58 USD or 60 USD per barrel earlier predicted by many international financial organisation such as IMF and WB, etc. In addition, the global food and food product prices have declined after the sharp appreciation in 2016. The FAO Food Price Index, after increasing by up to 11 percent in 2016, fell by 1.3 percent in the first four months of 2017. The drop of the global food and food product prices is due to the favourable global weather for agricultural production. Meanwhile, the low oil price is because the global economic growth is not as high as expected, as well as the OPEC has not achieved a long-term agreement on reducing the volume of exploitation between member countries with Russia.

Pressure to increase is still higher than pressure to decrease

While the price movements of global commodities are very unpredictable, domestic factors are not supporting CPI in the remaining months of 2017, although at the regular government meeting in May 2017, the prime minister has asked the Ministry of Industry and Trade to consider not yet raising electricity prices in 2017.

To lower the average CPI from the current 4.47 percent to 4 percent in the end of the year, CPI must continue to be controlled at low level in the near future. Currently, there are still many unfavourable factors for CPI.

Firstly, the food prices, particularly price of pork is at the lowest level. With the price of live weight fluctuating around 30,000-35,000 dong per kilogramme, pig farmers will suffer losses and they will not re-grow pigs. Thus, the upward trend of pork price is inevitable, and the issue is just the increase level.

The second negative factor for CPI is the adjustment of healthcare services for those who do not participate in health insurance. Accordingly, the first adjustment took place on June 1st 217, applicable to special-level public hospitals and about 3-4 adjustments are expected to be carried out in other public hospitals in the future.

The third factor is an uncertain one but has potential strong and direct impacts on CPI. That is the possibility that the government may accept to adopt moderate monetary easing in pursuit of the GDP growth target in 2017. Accordingly, capital will be injected more into the economy so that businesses have the opportunities to increase the volume of product and service production. The two capital injection channels regularly used by SBV in the past years including the Open Market Operation (OMO) and the purchase of foreign currency from commercial bank have less been used since the beginning of the year. However, as confirmed by many bank leaders, the State Treasury transferred a huge volume of non-term deposits at SBV to term deposits at commercial banks in April and May. The increase of money supply has caused the interbank rates to immediately plummet from 4.7-4.9 percent per annum on one-week tern to 2.3 percent per annum as of June 2nd 2017. To control inflation, SBV often withdraws money through issuing SBV’s certificates of deposits. However, to date, the agency has not made such moves.

Although the pressure to increase of CPI is still larger than the pressure to decrease, according to the writer’s point of view, the degree has fallen dramatically after the prime minister’s instruction to not increase electricity price in 2017. Electricity has a very important role, as it is the input of many manufacturing industries, it affects the expenses of all people and businesses, and it may put pressure on price increase of all kinds of goods and services.

 


Category: Economy

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