MỤC LỤC Acknowledgement 2 Introduction 3 List of Abbreviations 4 I Theoretical basis 6 1 1 Inflation 6 1 2 The impact of inflation on the economy 6 1 2 1 Regarding Predictable Inflation 6 1 2 2 Regard.
MỤC LỤC Acknowledgement Introduction List of Abbreviations I Theoretical basis 1.1 Inflation: 1.2 The impact of inflation on the economy .6 1.2.1 Regarding Predictable Inflation 1.2.2 Regarding unpredictable inflation II Causes of inflation in Vietnam during the period of 2007-2012 .8 2.1 Impact of global economic fluctuations .8 2.2 Cost-Push Inflation 10 2.3 The increase in aggregate demand has caused overheating in Vietnam 12 2.4 Monetary and credit growth .15 III Solutions to Control Inflation in the Period of 2007– by the Government 17 3.1 Implementing monetary policy 17 3.1.1 Interest rate adjustment policy 18 3.1.2 Policy of increasing the reserve requirement ratio .21 3.1.3 Open market operations .22 3.1.4 Credit limit control .24 3.1.5 Exchange rate policy 25 3.2 Fiscal policy 26 3.3 Some other policies 28 IV Assessment of Vietnam's Inflation in 2023 28 4.1 Global Inflation in 2022 28 4.2 Vietnam's inflation in 2022 30 4.3 Forecasting the Global Inflation in 2023 34 4.4 Forecasting Vietnam's Inflation in 2023 36 4.5 Solutions for inflation control in 2023 37 4.5.1 Regarding the Government: 38 4.5.2 For the enterprise sector: .39 Conclusion .41 References .42 Acknowledgement Introduction List of Abbreviations SBV: State Bank of Vietnam USD: United States Dollar VND: Vietnamese Dong CPI: Consumer Price Index GDP: Gross Domestic Product IMF: International Monetary Fund ADB: Asian Development Bank ICOR: Incremental Capital Output Ratio NICs: Newly Industrialized Countries WTO: World Trade Organization RRR: Reserve Requirement Ratio ERB: Exchange Rate Band ODA: Official Development Assistance EU: European Union I Theoretical basis 1.1 Inflation: Currently, there are many different perspectives on inflation, and different schools of thought have proposed different concepts of inflation According to K Marx, inflation is the phenomenon of paper money flooding the channels of currency circulation, exceeding the needs of the real economy, causing the currency to lose value, and redistributing the national income According to L.V Chandler and D.C Cliner of the inflationary price school, inflation is the long-term or short-term, cyclical or sudden increase in the prices of goods Additionally, Fisher (2011) defined inflation as a serious imbalance between money and goods in the economy, where the imbalance is in favor of money, causing prices to rise everywhere and at all times According to the Keynesian school, the rapid increase in money supply will cause prices to rise at a high rate and for a long time, resulting in inflation Conversely, Paul A Samuelson argues that inflation represents an increase in the general price level, and the inflation rate is the rate of change of the general price level In the 1970s, Milton Friedman argued that inflation is always a monetary phenomenon that can be created by increasing the money supply faster than the increase in output All the above perspectives on inflation have provided insights into some aspects of it When studying some of these perspectives, it is clear that inflation occurs when the amount of money circulating exceeds what is allowed, leading to inflation, and causing the currency to lose value compared to all other goods 1.2 The impact of inflation on the economy 1.2.1 Regarding Predictable Inflation Inflation that can be predicted does not have a significant impact on the economy Typically, when the predicted level is announced by the government, businesses, banks, and other institutions will adjust their salaries, contracts with partners, credit agreements, etc., to align with the predicted inflation rate When the predicted and actual inflation rates match, inflation will not significantly affect production output, income distribution, or the efficiency of other economic activities However, predictable inflation can still have some negative impact on the economy In inflationary conditions, the public's demand for cash decreases significantly People will convert cash into highly liquid currencies such as USD and EUR In addition, the tax system is also affected by inflation The nominal income of individuals increases with the predicted inflation rate to compensate for the loss of currency value At the same time, the income tax also increases with the increase in nominal income Furthermore, when prices fluctuate continuously, it creates difficulties in making decisions related to consumption structure, savings, and investment Moreover, when prices fluctuate, social resources must be updated to adjust to the changes, affecting the social and economic activities of the country 1.2.2 Regarding unpredictable inflation Inflation exceeding the predicted level causes significant harm to the economy due to its unexpected fluctuations When inflation goes beyond the predicted level, it creates an unusual change in the currency value, distorting all measurements of value relationships and affecting all social and economic activities in the country In addition, inflation also raises nominal interest rates In such situations, businesses prefer short-term loans rather than long-term loans with fixed interest rates, as long-term loan contracts involve more risks Moreover, inflation beyond the predicted level also affects the labor market, increasing the unemployment rate When the overall price level rises, it may lead to a decrease in the demand for goods, services, and labor As a result, the unemployment rate also increases Furthermore, inflation beyond the predicted level also has adverse effects on a country's balance of international payments and competitiveness in the international market When the inflation rate in a country is higher than that of other countries, the prices of domestic goods and services will be higher than those of foreign goods and services, adversely affecting the export of goods and services to foreign countries The decrease in exports leads to an increase in foreign currency demand, which adversely affects the current account balance and puts pressure on the exchange rate Under this pressure, the domestic currency may depreciate compared to the foreign currency The price of imported goods will increase, leading to an overall increase in the price level The result is that the inflation rate may continue to rise In conclusion, inflation, whether predictable or unpredictable, has certain negative effects on the social and economic development of a country Developing a strategy to control inflation and a plan to mitigate its consequences is essential to ensuring the sustainable development of the country II Causes of inflation in Vietnam during the period of 2007-2012 2.1 Impact of global economic fluctuations The fluctuation of prices for raw materials used for production worldwide has had a significant impact on inflation in Vietnam, as Vietnam imports many raw materials to serve its production process Oil prices continuously increased from 2003 to 2008, then decreased in 2009 and sharply increased in the following years In the five years from 2003 to 2007, the global economy continuously grew, especially in the group of newly emerging countries in Asia, particularly China, which pushed global energy demand to a sudden increase Along with the instability and military-political conflicts in the Middle East, these are the direct causes that have driven oil prices to historically high levels of $147 per barrel in July 2008, and input material prices such as iron and steel, fertilizers, and cement have also continuously increased In summary, the increase in oil prices has had a significant impact on Vietnam's inflation, as Vietnam depends heavily on imported oil Furthermore, the prices of food and agricultural products have continuously increased due to the reasons originating from the process of global climate change, consecutive natural disasters and epidemics, along with strong economic growth worldwide - the years of industrialization were promoted, leading to a reduction in land use for agriculture and animal husbandry All of these factors have caused a sharp decline in agricultural and food production Moreover, the high energy prices have led many countries to use a large amount of grain to produce biofuels, further reducing the supply of food On the other hand, a large amount of money has been injected into the global economy Due to the soaring prices of oil and food, which caused a huge supply shock, global inflation was pushed up This forced central banks to increase key interest rates to curb inflation Tightening monetary policies through dominant interest rates, along with rising oil and food prices, were the fundamental causes that pushed the global economy into recession in the early months of 2008, as evidenced by the subprime mortgage crisis that began in the US in July 2007 In the context of increasing inflation and a global economic recession, central banks implemented a solution by pumping a massive amount of money to rescue the economy, in which the US alone had to inject over $2300 billion into the economy from August 2007 to early 2008, including $800 billion in cash to save the banking system The central banks of Europe, Japan, and the UK also had to inject a large amount of money to rescue their economies and banking systems The rescue of the global economy from recession by injecting trillions of dollars into the economy only exacerbated the continued rise of global inflation In addition, in 2011, the European debt crisis had an impact on the recovery of the global economy after the 2008-2009 crisis 2.2 Cost-Push Inflation Costs are the main component that makes up the price of a product When costs increase, prices also go up, and this is one of the main causes of inflation Vietnam is a developing country that needs to import a lot of goods, such as machinery, equipment, raw materials, oil, etc., to meet the increasing production demand However, the prices of these goods on the world market are rising, which has led to an increase in production costs Regarding oil and gas, the continuous increase in world oil prices has affected the price of imported oil To control the price increase, the government has protected oil and gas by implementing price adjustment plans that are close to the world price and not affected by the constant fluctuations in the global market In 2007, the government adjusted the oil price five times, with a small increase each time The result was that the government had to spend a considerable amount of money from the budget to compensate for the loss of businesses To reduce this situation, on August 25, 2008, the Ministry of Finance decided to let businesses adjust prices according to market supply and demand, but under the supervision of the government On the same day, businesses increased prices from 14,500 VND/liter to 15,000 VND/liter The oil price continued to be adjusted on July 21, 2008, due to the rapid increase in global oil prices, and the difference in prices made it difficult for the government to provide additional subsidies As a result, the price of A92 gasoline was increased to 19,000 VND per liter The price of oil and gas has been adjusted many times over the years, depending on the global oil and gas market The most adjustments were made in 2009 and 2012 (13 times/year) The strongest fluctuation occurred in 2008, when the price of gasoline was only 13,000 VND/liter at the beginning of the year, but by July 21, 2008, it had increased to 19,000 VND/liter, and by the end of 2008, it had dropped to only 11,000 VND/liter The strong price fluctuations of gasoline had a significant impact on the complex inflation situation in 2008 Petroleum is always an important commodity and has a significant impact on other goods and services Therefore, every time there is a fuel price increase, the inevitable result is an increase in the prices of other goods through the chain reaction and psychological effects on consumers As for transportation costs, petroleum prices can affect up to 50% of freight charges Petroleum prices can also affect the prices of eggs and vegetables A group of commodities that are directly affected by petroleum prices will continue to affect the prices of other goods This is the indirect impact of petroleum prices that cannot be fully quantified and will have a significant impact on inflation trends For example, during the fuel price hike on November 22, 2007, when petroleum prices increased by 15%, the transportation services group increased from 3.58% to 5.8%, with road transport increasing by 5.17%, rail transport increasing by 3.58%, and river transport increasing by 5.8% As for food, rice increased by 1.51% and coffee increased by 1.57%, leading to the highest CPI (Consumer Price Index) in December 2007, which increased by 2.91% in about 16 years The rising trend of petroleum prices over the years is partly due to the fact that our country relies heavily on imported petroleum to meet domestic demand Another cause of production cost increases is the rising prices of imported machinery, equipment, and raw materials In 2007, the prices of products such as finished steel increased by an average of USD 93 per ton, steel billets increased to USD 105 per ton, fertilizers increased by USD 21 per ton, plastics increased by USD 144 per ton, fiber increased by USD 151 per ton, and the prices of other common metals increased by USD 469 per ton By 2008, the prices of these goods had increased at a higher rate The average price of fertilizer in the first months of 2008 increased by 45% compared to 21% in 2007, the price of petroleum products increased by 57% compared to