At the beginning of the year, the price shock of gasoline, food, medicine, fertilizer, etc. put people and businesses under pressure.
Pressure to increase prices: Petrol becomes the main factor
From the beginning of the year to March 2, the domestic retail gasoline price has been adjusted 5 times and has increased continuously. Compared to the first adjustment period on January 11, the price of E5 gasoline increased by nearly 2,918 VND/liter, RON95 gasoline increased by 2,958 VND/liter, diesel oil increased by 3,071 VND/liter… Petrol prices are forecast to hit a new peak.
According to the General Statistics Office, the cost of gasoline accounts for about 37% of the total cost of raw materials of the whole economy. The high price of world crude oil, as well as the price of finished petroleum products, will have a negative impact on the economy due to the high cost of raw materials.
At a seminar on inflation control held by Customs Magazine on March 9, Mr. Nguyen Bich Lam, former Director of the General Statistics Office, calculated: A 10% increase in petrol prices causes inflation to increase by 0. 36%. Consumer price index (CPI) in the first two months of 2022 increased by 1.68% on average over the same period last year, the increase in petrol prices made the overall CPI increase by 1.63 percentage points.
Along with the sudden increase in the prices of many other goods and materials, the inflation pressure for 2022 is assessed by Mr. Nguyen Bich Lam as “very large”.
The first pressure, according to this expert, is the sudden increase in aggregate demand, reflected in the positive retail sales in the first two months of the year, instead of the negative level like in 2021. In particular, the next 2 years of the support package VND 350 trillion will boost aggregate demand, while the main cause of inflation is an increase in aggregate demand.
The second pressure is the high price of raw materials when Vietnam’s economy depends on imported raw materials. The third pressure is supply chain disruption, which is the cause of very high inflation in the world. The shortage of labor causes businesses to spend more money to recruit workers, training also increases costs.
“Those are the factors creating inflationary pressure for 2022”, Mr. Lam concluded.
Mr. Nguyen Ba Khang – Deputy Director of the National Financial Supervisory Information Center under the National Financial Supervisory Commission, said: “The current period is different from previous inflation cycles. All previous inflationary cycles were caused by aggregate demand growing too quickly, above the economy’s potential output. This time, inflation was caused by a lack of supply of basic goods for production.”
According to Mr. Khang, in the first quarter of 2022, inflation may increase by 2-2.2% compared to the first quarter of 2021. Although the 350 trillion VND support package increases aggregate demand, Mr. Khang said that “don’t worry too much about this package causing aggregate demand to increase too much”. Importantly, to control inflation, it is necessary to strengthen the coordination between different policies such as fiscal, monetary and other supportive policies.
Scarcity of supply will push prices up
“The nature of the inflation risk this time is a shortage of supply,” Mr. Nguyen Ba Khang repeated. “Therefore, controlling aggregate demand, credit, and worrying about too much money supply are not the issues that need to be raised right now.”
“We need to focus on the goal of economic recovery. To do that, obviously, the role of price stabilization and inflation control is very important. First, it is necessary to stabilize the macro-economy, control the price increase of consumer goods, then there will be a foundation for sustainable economic development”, said Mr. Khang.
Mr. Nguyen Bich Lam said that stable prices and controlled inflation will promote the process of economic recovery and development. When prices are stable, macro stability will be maintained. This is an important factor that Vietnam has done well in the past time, creating confidence for investors and businesses to feel secure to expand production and invest in Vietnam.
In addition, when prices are stable, controlling inflation will help implement investment projects, especially in infrastructure investment. High prices force contractors to spend time renegotiating with the investor, making the project behind schedule. When the project is not behind schedule, the project will soon bring into play its effectiveness, contributing to growth not only this year next year but many years to come. On the other hand, stable prices do not reduce people’s incomes, they will rest assured to spend and invest – a factor that promotes an increase in aggregate demand.
According to this expert, macro stability will not pose risks and reduce the effectiveness of fiscal, monetary and other policies, especially those outlined in the 350 trillion dong support package.
Further analysis, Mr. Lam found that fiscal policy accounted for 291 trillion (83%), monetary policy 55 trillion (accounting for 14%), and 3% were other supportive policies.
Whether the support package will make “money supply rushing, causing inflation”, Mr. Nguyen Bich Lam affirmed: It is not so.
“In the monetary package, the National Assembly and the Government have approved to reduce VAT from 10% to 8% for many goods and services. Thus, this policy does not have to increase the money supply. Or the granting of interest compensation for businesses is not a money injection. The enterprise should have paid 10% of the loan cost, now it only has to pay 9%. Those are solutions that the Government and ministries have carefully studied, have a plan to implement methodically and in the right dose, so they do not cause inflation”, Mr. Lam said.
But the inflationary pressure of this package, according to him, is that when demand increases, more materials will be needed, such as infrastructure investment, which requires more iron and steel and construction materials. Thus, the pressure to increase inflation from this economic recovery package does not come from the money supply, but from how to ensure the supply of raw materials for the economy.
Therefore, it is necessary to ensure enough supply, not to disrupt the supply chain so as not to create inflation, contributing to stimulating economic recovery, he noted.