by Dzung Trieu law firm

In 2011, the government vowed to curb the inflation rate. In early 2012, people sighed with relief when hearing about the low inflation rate. However, the repeated slow consumer price index (CPI) increases have raised worries instead of joys.

The inflation downward trend continues with the CPI in May increasing by 0.18 percent only over the month before, which means that the inflation rate of the first five months of the year stays at 2.78 percent.

The low inflation rate in May has given one more reason to affirm that the one digit inflation rate in 2012 is within reach.

However, Vu Dinh Anh, a well known economist, has pointed out that the story now is not about how high the inflation rate would be, but about what has led to the slow CPI increases.

One would think that the 2008’s scenario is repeated, when the CPI increase slowed down significantly in the last three months of the year after 10 months of skyrocketing.

However, the low inflation rates in 2008 and 2012 have been caused by different reasons. In 2008, the narrowed export markets led to the production stagnation and low CPI. In that year, the GDP growth rate was low, but manufacturers still could sell their products on the domestic market.

Meanwhile, in 2012, enterprises not only cannot export products due to the global economic crisis, but also cannot sell products domestically due to the demand sharp falls.

Anh has pointed out that the weak demand is the main factor that has led to the inflation decrease.

In fact, the CPI increase in May was a little higher than the previous month. However, this was influenced by the petrol price hike in March and the decision on raising the minimum wages.

A paradox exists that though the petrol price increased, and the minimum wages have been heightened, the goods prices have not increased. This has been explained by the weak demand, though the demand has been improved.

A report by Nielsen released in early May 2012 showed that while the global consumers’ confidence increased by five points in the first quarter of 2012, the Vietnamese consumers’ confidence index dropped by five points for the fears about economic downturn.

Up to 68 percent of Vietnamese people think Vietnam can hardly escape from the economic crisis in the next 12 months, up by 3 percent from the index of the fourth quarter of 2011.

Practicing thrift has become the top choice of 69 percent of Vietnamese consumers, up by 4 percent.

The low demand led to the 0.14 percent price decrease in May in the food and meal service sector. Similarly, the 0.17 percent decrease has been reported for construction materials. Only transport services saw the highest increase of 1.32 percent.

A report by the National Assembly’s Economics Committee showed that in the first four months of the year, 171,639 people registered their unemployment, up by 61.4 percent in comparison with the same period of the last year.

Tens of thousands of enterprises have shut down or narrowed the production scale, which has led to the job cuts. Once the income decreases, people would not have money to buy goods and services, thus leading to the weak demand. This, once again, has had impacts on the production and business, because the consumption is the driving force for the production.

“The CPI increases have been slowing down due to the demand decreases,” Anh affirmed. “This may lead to the deflation, while it would be much more difficult to cure deflation than inflation.”

Source: TBKTSG/ Vietnamnet