Vietnam’s inflation has fallen in the first four months of 2006, which bodes well for the yearly rate, but signals show future price increases in the consumer market.

The inflation rate of the period stood at 3 percent or 1.3 percent less than that of the same period last year.

Considering inflation of the first four months accounts for half of the year’s inflation rate, which was 8.4 percent in 2005, it seems Vietnam can curb the 2006 inflation rate below 7 percent as forecast by the central bank earlier this year.

There are grounds for believing this point of view if we look at the movements of the factors that caused consumer prices to increase in the past four months.

First, the money supply for the economy has fallen since more money has been deposited in banks than taken from banks to put into circulation. The currency’s increased value has eased the pressure of a consumer price hike.

Second, Vietnam has cut import tariffs to meet its integration commitment with regional countries. As a result, more foreign goods are now available at lower prices for Vietnamese, which has also helped ease the price hike pressure.

Besides, a considerable amount of money in circulation has been drawn to several investment channels other than consumer goods and services, like gold and stocks whose prices have gone through the ceiling.

By the end of April, gold price had surged over one-third, while the Vietnamese VN-Index hiked by more than 107 percent since the beginning of this year.

Therefore, pressures have been eased on the prices of consumer goods and services, or inflation.

Last but not least, the low inflation rate is also a result of the government’s decision to wait until late March before giving the green light to the increase of some “strategic” goods and services, for example electricity and oil and gas.

Imminent risks to higher inflation

However, other factors have made it too early to predict an acceptable annual inflation rate this year.

First, that significant amount of currency which has been rushed to the gold and stock fevers would be transfer back to the consumer goods market if the heat cooled down.

Yet there already have been signs of an imminent downward trend in the gold and stock markets.

After peaking at VND14.2 million (US$889) a fortnight ago, the price of a tael of gold is now almost a million cheaper. One tael is equivalent to 1.2 oz or 37.4 g.

Meanwhile, VN-Index on closing last Monday was 601,34, a decrease of about 20 points as compared with ten days before.

Even if gold and stock prices would not decrease further, they have become less attractive to investors.

That would mean a large amount of money intended for gold and stock investment could be put back into circulation, thus applying heavier pressure consumer prices.

Second, the global price of oil now stands at $70 per barrel, at times reaching the 23-year record high of over $75, threatening to surge even further if the Iranian nuclear row deteriorated.

In late April, the government finally decided to increase retail gasoline by VND1,500 – a record hike so far. It is also considering the state-owned dominant power utility’s proposal to increase electricity prices.

The increases will have a domino effect on the prices of goods and services in general and of the consumer market in particular.

That is not to mention a practice popular among a number of Vietnamese businesses to increase prices of their products “in advance,” or much higher than necessary.

Finally, following the increase of the regulated minimum salary in foreign-invested businesses, there will also be several increases in the non-foreign-invested sector, and the state administrative agencies.

The combined effect would be to put even more pressure on consumer prices.


Source: Thanhniennews