High risk of inflation upsurge

CIEM’s prediction points out that inflation expectations in the last 6 months of 2016 and all of 2016 remain at around 6-7%. Photo taken: Huu Linh

According to reports of the Vietnam Institute for Economic and Policy Research (VEPR), in the second quarter of 2016, Headline inflation was higher than Core inflation (inflation indicators eliminating volatile items such as Food and Energy prices, reflecting price changes with long-term nature) showed a strong rise in the consumer price index of commodities managed by the State such as Food and energy.

Whilst Core inflation remained at 1.8%, Headline inflation has exceeded 2% and reached 2.35% in June. According to VEPR, accelerating of inflation is not only due to the price adjustment of the State, but also by the recovery of world commodity prices.

Based on this development, the Prime Minister has directed not to increase the retail price of electricity and the BOT fee in 2016; also adjust medical services price in a itinerary with appropriate steps and would not adjust simultaneously in all provinces in order to avoid inflationary surge.

According to Dr. Nguyen Duc Thanh, VEPR Director, even though the risk of rising inflation is still really high since oil and other basic commodity prices have bottomed out and trending up again. This could be the main factor influencing the national consumer price index in the second half of this year.

In addition, electricity price may not increase yet, but other services such as Health and Education are likely to increase in the second half of the year according to the set-out schedule. This will create significant pressure on inflation in the coming period.

According to a report of the Central Institute for Economic Management (CIEM), price adjustment still faces a number of risks and pressures in the second half of 2016.

First, the price increase itinerary of commodities and services controlled by the State, especially the price of Medical services and Tuition, continue to be implemented. More importantly, this implementation of price increase has not been explained sufficiently to make people perceive clearly about the increased quality of commensurate services.

Second, the general interest rate is difficult to reduc because of the requirement to continue issuing Government bonds.

Third, the fluctuation of foreign capital flows and international financial markets may entail unpredictable reactions of the major economies (on interest rates, exchange rates, etc.) and could trigger pressure on the control of prices, and exchange rates in Vietnam.

In general, based on the report of the Central Institute for Economic Management, the price increase in the first 6 months (2.35%) was lower than the annual target (under 5%), capable of meeting the inflation target.

However, inflation expectations in the last 6 months of 2016 and the entire year remain high, around 6-7%. Consequently, price adjustment should stay cautious, especially the need of cooperation in implementing other policy goals (such as issuing Government bonds, rising prices of Medical services and Tuition).