Controlling CPI

Controlling CPI

The consumer price index (CPI) increased by 7.7 per cent in the first seven months of this year in comparison to the figure last December. This increase is 1.5 times higher than the target set for the whole year by the National Assembly and it constitutes an eight-year record high. Doctor and Professor Associate Ngo Tri Long, deputy director of the Institute of Market and Price Research, discussed the nature and reasons for the situation, as well as solutions to control prices in the final months of this year.

What particular features distinguish consumer prices in the first months of this year against previous years?

In previous years, after a high increase in the first quarter, consumer prices tended to fall or remain stable in the following months. However, in the first half of this year, CPI kept on rising, 1.1 per cent per month on average. CPI is now higher than interest rates of loans from banks and the State Treasury, resulting in a negative real interest rate.

Some of the principle reasons for the high increase in prices are as follows. Firstly, prices of some major goods that relate directly to domestic production, such as oil and petrol, steel, fertiliser, plastic and pharmaceutical materials, increased in the region and the world. This has consequently impacted prices in Vietnam. Secondly, the outbreak of bird flu caused severe damage to Vietnam’s poultry causing consumer demand to shift to other food. Furthermore, increased input costs for food production due to the swelling of oil, petrol, fertiliser and pesticide prices, has resulted in an increase in prices of finished products. Thirdly, some ministries and agencies have yet to effectively perform market management, resulting in monopoly distribution, speculation and increasing costs in exporting and importing goods, such as medicines, steel and fertiliser.

While the CPI saw an increase of 7.7 per cent, Vietnam’s economic growth rate in the seven months was lower than that of the CPI. Is this a particularly troublesome situation to be in?

As a rule, the growth rate of gross domestic product (GDP) must be higher than the growth rate of inflation in order to ensure that the economy develops in a healthy and effective manner. In which case, Vietnam’s economy is indeed showing negative signs. Regardless of reasons, a high increase in consumer prices will produce negative impacts on the implementation of macro-economic targets. A sudden increase in input prices has made it difficult for enterprises, resulting in a lower competitiveness of domestic units and the economy as a whole. The high increase in prices of imported fuel and materials, including oil and petrol, steel and fertiliser, has strained State budget revenues and the implementation of monetary policies of the State Bank of Vietnam due to negative attitudes and speculation towards the economy.

CPI is forecasted to continue to increase, exceeding the target set by the National Assembly’s resolution. In light of difficulties in price control, what predictions can you make on the issue in the coming time?

It is indeed difficult to forecast the 2004 CPI because it is impacted by such a variety of fluctuating factors. However, based on socio-political developments and other factors impacting prices in the remaining months of 2004, it is clear that world prices of products relating to Vietnam’s import and export activities will remain high or continue to rise slightly from now until the end of the year. This will impact other products. World oil prices are always difficult to predict but are likely to remain at a very high level due to political instabilities in the world. Internal factors of the economy, such as the recently adjusted price of oil and petrol has produced negative impacts on the production costs of some industries. Salary reforms in the State-owned sector scheduled for this October is another reason for the price increase. However, falling prices of steel and plastic materials in the world market and Vietnam’s tariff cutting scheme in accordance with aims of regional and international integration will help ‘cool’ the local consumer price.

If Vietnam is determined to take tough measures to control prices and there are no unfavourable developments in the world market or natural disasters, Vietnam’s CPI will see a one-digit increase and the State will be able to control prices.

• Reported by Dieu Linh