GENERAL VIEW OF INFLATION
Definition of inflation
Inflation is a longstanding economic concept that has evolved alongside the development of currency Over time, the definition of inflation has undergone significant changes, leading to the emergence of various theories that each offer distinct perspectives on understanding and assessing this economic phenomenon.
Economists like Keynes and Friedman believed that inflation occurs when there is an excess of paper money relative to the demand for goods and services This devaluation of paper money results in rising prices Milton Friedman famously stated, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Palgrave Dictionary of Economics, 1987, quoted in P A Samuelson, Economics,
Inflation is commonly defined as the sustained increase in prices over an extended period, leading to a decrease in currency value relative to goods and services It is closely linked to commodity production and the circulation of currency The key challenge is to manage inflation at a reasonable rate, as this level of inflation can also encourage production and consumption.
Deflation, as defined by Professor David N Hyman, is a general decline in the price levels of commodities and services, contrasting with inflation Economists P.A Samuelson and W.D Nordhaus echo this sentiment, noting that deflation arises when the overall price level of goods and services decreases This continuous drop in prices enhances the purchasing power of currency, making deflation a significant economic phenomenon.
Inflation‟s scale
Moderate inflation refers to a gradual increase in prices, typically below 10% annually, where currency value remains stable and public confidence in money persists This level of inflation is common in many countries and generally does not have a substantial negative effect on the economy.
Galloping inflation is characterized by rapid price increases, often ranging from 30% to 500%, leading to a swift depreciation of money As a result, individuals tend to retain only a minimal amount of cash for daily transactions This extreme inflation can have severe repercussions for the economy.
Hyperinflation is characterized by an extremely rapid increase in prices, often reaching hundreds of percent per month or thousands of percent annually This phenomenon cannot persist for extended periods, as it can render currency nearly worthless, leading to widespread business bankruptcies and diminishing the need for money in daily transactions Consequently, countries experiencing hyperinflation must urgently reform their economic policies to address and control the soaring inflation rate.
Inflation‟s measurement
To effectively evaluate the impact of inflation on the economy and formulate suitable policies for each period, it is essential to develop a formula for measuring the inflation index The inflation rate serves as a crucial indicator of the inflationary conditions during a specific timeframe.
Inflation rate is calculated by the formula:
- I p : price index in examined period
- I p-1 : price index in the base period
In fact, the rate of inflation is indicated by the price index
The Consumer Price Index (CPI) is a key metric for measuring inflation, reflecting the weighted average price changes of a specific set of goods and services over time Each country determines the selection and quantity of these goods based on its regulations To calculate the CPI, a series of systematic steps must be followed.
- Choose basket of goods: through investigation, we will determine the amount of typical goods and services that a consumer buys
- Determine prices: collect statistics on price of each item in the basket at a time
- Reckon the cost (in notes) to buy a basket of goods using the quantity multiplied by the price of each commodity and then add together
- Opt for the base period as a basis for comparison and calculation of CPI by the following formula:
The Consumer Price Index (CPI) is calculated by determining the weight of various goods and services based on expenditure surveys, which assess the proportion of spending for each category relative to total expenditures This weight is essential for calculating the CPI over different periods, typically on a monthly and annual basis Additionally, the CPI can be computed for individual commodities or specific groups of commodities based on their intended use.
When calculating the Consumer Price Index (CPI), several challenges arise due to the reliance on a fixed basket of goods This approach leads to three significant limitations that affect the accuracy and relevance of the CPI as an economic indicator.
The Consumer Price Index (CPI) may not accurately reflect economic realities because it relies on a fixed basket of goods When the price of a specific commodity rises significantly, consumers often shift their spending towards less expensive alternatives, leading to an overestimation of the actual price increase in the CPI For instance, if chicken prices surge due to a flu outbreak, consumers are likely to opt for fish or other meats to maintain their protein intake, illustrating how CPI can misrepresent true consumer behavior and spending patterns.
The Consumer Price Index (CPI) fails to account for new goods due to its reliance on a fixed basket of items, which means that the introduction of innovative products does not influence its calculations For instance, while the price of mobile phones has decreased over time, they are not included in the CPI basket As a result, the CPI does not accurately represent the true purchasing power of currency, often leading to an overestimation of actual prices.
The Consumer Price Index (CPI) fails to account for changes in the quality of goods, leading to potential misrepresentation of price increases When both the price and quality of a commodity rise, the actual price may remain unchanged, as improvements in quality often accompany higher prices Consequently, the CPI may overstate the true cost of living by not accurately reflecting these quality adjustments.
In Vietnam, the General Statistics Office (GSO) is responsible for calculating the Consumer Price Index (CPI), using weights established in 2000 and implemented in July 2001 These weights were derived from two surveys conducted on the Living Standards of Residents in Vietnam from 1997 to 1998 and Households Economy in 1999 Notably, the foodstuff group holds a significant weight of 47.9%, whereas the Culture, Sports, and Entertainment category comprises only 3.8%.
The General Statistics Office (GSO) reviews the Consumer Price Index (CPI) calculation method every five years to align with international standards and national realities As of May 1, 2006, GSO updated the CPI calculation method for the period from 2006 to 2010, enhancing the list of goods and services surveyed to better reflect current consumer market trends.
Accordingly, the list of investigation of consumer prices rose from 396 (2000-
In 2005, the General Statistics Office (GSO) expanded the Consumer Price Index (CPI) to include 496 items and updated the CPI weights, which reflect the percentage of the market basket represented by each index component These weights are determined based on detailed spending reports from numerous families, derived from household living standards surveys conducted by GSO As a result of the new weights, the proportion of food consumption in the population's overall spending decreased from 47.9% between 2000 and 2005 to 42.8% from 2006 to 2010.
In Vietnam, the monthly Consumer Price Index (CPI) is calculated using three comparison bases: the previous month, December of the previous year, and the same month from the prior year The General Statistics Office (GSO) conducts surveys and computes the monthly CPI based on these criteria Additionally, GSO calculates quarterly and annual CPI using the previous year as the base period to supply essential information for specific sectors This method of CPI calculation aligns with the operational and management needs of the population.
The determination of annual inflation targets based on the Consumer Price Index (CPI) in December, comparing the current year to the previous year, does not align with international standards This practice is particularly problematic in Vietnam, where December precedes the Lunar New Year, leading to seasonal price increases Consequently, using December CPI data may not accurately reflect the overall inflation trends for the year.
December each year, the growth rate of the following month is usually low Many countries did not use the method of calculation because the accuracy is not high
CPI reflects the volatility of wholesale prices and cost of production Changes in input costs would lead to changes in the trend of prices on the market
The GDP deflator, similar to the Consumer Price Index (CPI), gauges price inflation or deflation relative to a specific base year Unlike the CPI, the GDP deflator reflects the price levels of all new, domestically produced final goods and services within an economy It is calculated using a specific formula that captures these price changes.
Unlike the Consumer Price Index (CPI), the calculation of Domestic Gross Domestic Product (DGDP) does not rely on a fixed basket of goods, allowing it to account for substitutions between goods and services However, DGDP fails to capture the decline in consumer welfare when individuals reduce their consumption of certain goods, such as when a flu epidemic raises chicken prices, prompting consumers to buy less chicken and more pork While the CPI focuses solely on consumer goods, DGDP also includes prices of goods purchased by businesses and the government, making it a more comprehensive measure of the general price level Additionally, DGDP reflects only domestic goods prices, whereas the CPI includes prices of imported goods; for instance, a rise in imported car prices would affect the CPI but not DGDP Nevertheless, statistical analyses indicate that the difference between CPI and DGDP is minimal.
Causes of inflation
Demand-pull inflation arises when aggregate demand outpaces the economy's potential output, causing prices to rise as equilibrium is reached between aggregate supply and demand This phenomenon can be attributed to three main factors: an increase in the money supply, heightened government spending, and a rise in exports Essentially, demand-pull inflation reflects excessive spending on a limited supply of goods, particularly when the economy is at labor market equilibrium The mechanism of demand-pull inflation is illustrated in the accompanying model.
Figure 1.1: Demand-pull inflation mechanism – Source: Investopedia.com
In the short term, when aggregate supply falls short of potential output (Y*), even a minor increase in output prices can incentivize producers to boost production to meet rising demand, resulting in higher revenues However, once output surpasses Y* and reaches Y1, input costs adjust upward, diminishing the incentive for further production despite elevated prices Consequently, even with significant price increases, the quantity of goods produced only sees a slight rise As demand remains high, the aggregate demand curve shifts from AD0 to AD1, causing prices to rise from P0 to P1 This ongoing increase in aggregate demand leads to a continuous rightward shift of the AD curve, resulting in persistent price inflation known as demand-pull inflation.
When the demand curve shifts to AD 1, the output surpasses potential levels, prompting producers to capitalize on increased employment This situation causes workers to pressure employers for higher wages, resulting in a leftward shift of the aggregate supply curve from AS 1 to AS 2 Consequently, prices rise from P 1 to P 2, aligning output with potential levels As aggregate demand shifts right and aggregate supply shifts left, output stabilizes at potential levels while prices continue to escalate.
Cost-push inflation occurs when rising costs, driven by factors such as increased wages, higher material prices, tax policies, and additional expenses, lead to higher overall prices Inefficient management practices and outdated production technology further exacerbate these rising production costs The following model illustrates the dynamics of cost-push inflation.
Figure 1.2: The process of cost-push inflation – Source: Investopedia.com
Initially, the aggregate demand curve is AD0; the aggregate supply curve is AS0
As input costs rise, producers decrease the supply of goods and services, causing the aggregate supply (AS) curve to shift leftward to AS 1 This shift results in a reduction of output to Y 1 and an increase in prices from P 0 to P 1 This situation, characterized by rising prices alongside declining output, is known as stagflation, which is often accompanied by increasing unemployment.
In a monetary economy, moderate inflation typically remains consistent with historical levels, characterized by a steady increase in prices at a stable rate This phenomenon, known as inertial inflation, is predictable, leading to its classification as anticipated inflation Economic activities rely on this predictable rate for essential calculations and adjustments, such as modifying nominal interest rates, wages, prices in contracts, and budget expenditures.
The model illustrates the process of anticipated inflation, where both the Aggregate Demand (AD) and Aggregate Supply (AS) curves rise at an equal rate As inflation is expected, adjustments are made to production costs, including wages, and expenditure demand to align with the inflationary pace Consequently, while output remains constant, prices increase steadily over time as anticipated.
Figure 1.3: The process of anticipated inflation – Source: Investopedia.com
Once established, the anticipated inflation rate stabilizes and becomes self-sustaining over time However, new economic shocks, whether originating domestically or internationally, can disrupt this state of inertia and trigger fluctuations in inflation.
Rising exports can lead to a situation where aggregate demand exceeds aggregate supply, particularly if products are primarily allocated for export rather than the domestic market This reduction in available goods for local consumption results in a lower aggregate supply compared to aggregate demand, ultimately causing inflation due to the imbalance between these two economic factors.
A variety of products are not produced domestically and must be imported When import prices rise due to increased costs from foreign suppliers or a depreciation of the domestic currency, the selling prices of these products also escalate in the importing countries This situation leads to inflation, as the rising import prices contribute to an overall increase in the general price level within those countries.
Besides, there are some other types of inflation, such as:
Structural inflation occurs when efficient businesses raise nominal wages for their workers, prompting inefficient businesses to do the same to retain talent To maintain profitability, these inefficient businesses then raise their product prices, leading to overall inflation.
Monetary inflation arises when the growth rate of the money supply surpasses the real growth rate of the economy, often seen in developing countries implementing expansionary monetary policies For instance, if the money supply grows by 10% while the economy only grows by 7%, the resulting monetary inflation is 3% This situation can be exacerbated by financial repression, where central banks print more money to address government budget deficits, leading to an excess of money in circulation relative to goods and services produced Consequently, when aggregate demand outpaces supply, inflation occurs, highlighting the delicate balance between monetary policy and economic growth.
Inflation can be self-perpetuating; when individuals anticipate rising prices, they adjust their behavior by increasing consumption This heightened demand often surpasses supply, leading to further inflationary pressures.
1.4.5 Other subjective and objective causes
Inconsistent economic management policies, such as fluctuating economic structures and interest rate strategies, disrupt the balance of the national economy and hinder growth, adversely impacting national finances When the state budget faces a deficit, an increase in the money supply becomes unavoidable In certain cases, some countries may resort to using inflation as a strategic tool to facilitate their economic development policies.
- Objective causes: natural disasters, war, the volatility in the market of raw materials and fuels in the world
Inflation impact on the economy
Along with the price increase, the national output also changes; it can increase, decrease or remain unchanged sometimes
Inflation driven by demand occurs when an increase in aggregate demand shifts to the right, leading to a rapid rise in the general price level This surge in demand can result in higher output, but the extent of this increase is influenced by the slope of the aggregate supply curve Consequently, while yields may rise, the degree of this increase varies based on the responsiveness of the supply side of the economy.
Inflation driven by supply issues leads to a decline in output and rising prices, resulting in stagflation The extent of production decrease is influenced by the slope of the aggregate demand curve.
1.5.2 Impact on the income allocation between parties
In overall, inflation impact on income distribution to some degree depends on many factors and many economic actors There are some impacts as follows:
- The impact on lenders and borrowers
During inflation, the dynamics between borrowers and lenders are influenced by the actual interest rate When the actual inflation rate deviates from the expected rate, income shifts between borrowers and lenders Greater discrepancies between the actual and anticipated inflation rates lead to increased allocation levels.
To avoid this redistribution, the lending process must be determined according to the floating rate; this rate should always be determined by the formula:
Floating interest rate = real interest rate + inflation rate
- The impact on labors and the boss
Wage growth typically lags behind price increases, placing workers at a disadvantage while benefiting employers This disparity in the distribution of income persists even when wage growth matches the rate of inflation.
- The impact on the businesses together
The disparity in the growth rates of commodity prices during inflation can put enterprises at a disadvantage, particularly those that produce goods with low price growth that remain unsold for extended periods.
- The impact between the government and the public
Inflation causes a significant shift of public income into government hands due to several factors Primarily, wages and subsidies tend to remain fixed for extended periods, failing to keep pace with rapid price increases Additionally, as inflation drives up individuals' incomes, they often face higher tax rates, particularly with income tax, further contributing to the government's revenue.
Inflation significantly affects the redistribution of wealth by altering the real value of individuals' assets Generally, unexpected inflation benefits borrowers while disadvantaging lenders, whereas unforeseen deflation has the opposite effect However, inflation primarily disrupts income and property values, leading to random income redistribution among various groups, with minimal impact on any specific group.
1.5.3 Impact on the economy structure
During inflationary periods, the prices of goods fluctuate unevenly, causing certain industries to experience rapid price increases that boost their market share and alter their competitive standing As inflation accelerates and relative prices shift dramatically, some sectors thrive while others struggle, face bankruptcy, or pivot to different industries, ultimately reshaping the economic landscape.
1.5.4 Impact on the economy efficiency
- Inflation changes the investment structure
Inflation leads businesses to avoid investing in long-term projects due to the uncertainty of returns, which can hinder overall economic efficiency This reluctance to invest can result in decreased production capacity, ultimately impacting the workforce and the economy as a whole.
AS curve shift to the left AS together with the reduction in the potential yield
- Inflation weakens the capital markets
Negative real interest rates hinder credit institutions' ability to raise capital, leading to reduced savings and a subsequent decline in actual investment This results in decreased production, fewer job opportunities, and a rise in unemployment rates.
- Inflation falsifies the price signals
Price serves as a crucial indicator for buyers and sellers to make optimal decisions During periods of high inflation, the rapid rise in prices can lead to confusion regarding the relative costs of goods, ultimately diminishing the effectiveness of purchasing choices.
- Inflation raises the cost of price adjustment
Businesses are required to incur extra costs for price adjustments, which may include updating their price lists or menus Additionally, some companies may need to allocate funds for meetings specifically focused on these price adjustments.
- Inflation reduces the competitiveness with foreign countries
Rising domestic prices are likely to boost imports while hindering exports, leading to a situation where many local businesses may temporarily shut down or even face bankruptcy due to increased competition from imported goods.
- Inflation stimulates the withdrawal of foreigners
Inflation leads to the depreciation of the domestic currency, prompting many foreign investors to repatriate their investments to ensure stable income This trend significantly weakens the capital market.
Sub-conclusion
Inflation is commonly defined as the phenomenon of continuously rising prices over an extended period, leading to a depreciation of currency in relation to goods and services As prices increase, each unit of currency buys fewer goods, resulting in a decrease in purchasing power and a loss of real value in the economy Economists categorize inflation into three levels: moderate, galloping, and hyperinflation Key indicators like the Consumer Price Index (CPI) and the GDP deflator (DGDP) are used to measure inflation levels In Vietnam, the General Statistics Office (GSO) calculates and reviews the CPI every five years to align with international standards and the country's specific context Inflation can arise from various factors and has both positive and negative effects on the economy Central banks strive to manage inflation and prevent deflation to ensure economic stability.
THE REALITY OF INFLATION IN VIETNAM
Inflation situation in the world
2.1.1 Some worst cases of hyper inflation in history
The highest monthly inflation rate: 29,500%; Prices doubled every 3.7 days
The Deutsche Mark (Papiermark) was introduced in 1914 following the end of the Gold Standard At the onset of World War I, the exchange rate was 4.2 DM to the US dollar By August 1923, the exchange rate skyrocketed to 1 million DM for a single dollar, escalating to 238 million DM by November of the same year This hyperinflation led to a psychological phenomenon known as "Zero Stroke," as Germans were forced to conduct daily transactions involving hundreds of billions of Deutsche Marks.
High inflation in Germany led the government to revalue the Deutsche Mark (DM) and replace the Papiermark with the Rentenmark at a rate of 4.2 Rentenmark per USD While the Rentenmark effectively stabilized the economy, the ongoing hyperinflation and economic challenges contributed to the rise of the Nazi Party and Adolf Hitler, ultimately resulting in the collapse of the Weimar Republic by 1933.
While many attributed hyperinflation in Germany to excessive money printing for wartime expenses, the true root cause emerged a few years later.
In 1914, Germany transitioned from using gold for currency minting to borrowing funds to finance the war By 1919, the price of goods had nearly doubled, coinciding with Germany's defeat However, between 1919 and 1921, the value of its currency remained relatively stable compared to the hyperinflation that followed in subsequent years.
The Treaty of Versailles mandated that Germany compensate war damages in gold or foreign currencies instead of its own Papiermark This requirement compelled the German government to utilize Papiermark backed by government debt to acquire foreign currencies, leading to a rapid devaluation of its currency.
In January 1923, French and Belgian troops occupied the Ruhr Valley after Germany failed to pay its debt, leading to widespread strikes and protests among workers This occupation exacerbated the already deteriorating situation, as European governments struggled to find a resolution Consequently, Germany's economy plummeted, resulting in hyperinflation within just over a year and a half.
The highest monthly inflation rate: 13,800%; Prices doubled every 4.3 days
Inflation in Greece began in October 1943 during the German occupation in World War II, escalating dramatically by October 1944 when the exiled Greek government regained control of Athens At this peak, prices surged by an astonishing 13,800%, followed by a further increase of 1,600% in November.
In 1938, Greeks typically held onto their money for an average of 40 days before spending it; however, by November 10, 1944, this duration drastically decreased to just 4 hours Additionally, while the largest denomination of the Drachma was 50,000 in 1942, it skyrocketed to an astonishing 100 trillion by 1944.
On 11 th November 1944, the Greek government had to revalue its currency and to change old Drachma into a new one with the rate was 50 billion old Drachmas: 1 new Drachma However, the majority of people still used Pound Sterling as an unofficial currency until mid-1945
The primary driver of hyperinflation in Greece was the war, which plunged the nation into significant debt and resulted in four years of occupation that stifled trade In 1939, Greece recorded a budget surplus of 271 million Drachmas, but by 1940, this transformed into a staggering deficit of 790 million Drachmas This drastic shift was largely attributed to declining trade, shortages of essential raw materials for industrial production, and unforeseen military expenditures.
From January to May 1945, Greece saw a controlled price increase of only 140%, largely due to the efforts of economist Kyriakos Varvaressos By June 1945, the country experienced a significant deflation of 36.8% However, initiatives aimed at increasing foreign aid, boosting domestic production, and regulating wages and prices through property redistribution ultimately worsened Greece's budget deficit, leading to Varvaressos's resignation on September 1st.
Following the civil war of 1945-1946, Britain introduced a stabilization plan for Greece aimed at enhancing revenue from relief goods, revising special tax rates, improving tax collection, and forming a monetary committee with Greek, British, and American representatives to address financial issues By early 1947, Greece experienced stabilized prices, renewed consumer confidence, and rising incomes, successfully overcoming hyperinflation.
The highest monthly inflation rate: 13,600,000,000,000%; Prices doubled every 15.6 hours
In the first half of 1946, Hungary experienced the worst hyperinflation in history, with the highest denomination banknote reaching an astonishing 100 quadrillion Pengo, a stark contrast to just 1,000 Pengo in 1944.
The government introduced a special currency for taxes and postage due to the escalating situation, which was updated daily through radio broadcasts This currency, known as Pengo, was eventually replaced following a revaluation.
Pengo was replaced in August of 1946, the total value of all banknotes in circulation in Hungary is only worth 1/1000 USD
After World War I, Hungary introduced the Pengo to stabilize its economy and combat inflation The agricultural sector suffered significantly during the Great Depression, leading to substantial debt that compelled the central bank to devalue the currency through relaxed fiscal and monetary policies By the onset of World War II, Hungary's economy was fragile, and the central bank, largely government-controlled, was forced to print money unrestrictedly to meet budgetary demands.
Inflation situation in Vietnam
Inflation situation in Vietnam in 2010 was very intricate
Figure 2.3: Inflation in 2010 (%) – Source: GSO
In December 2010, the General Statistics Office (GSO) reported a Consumer Price Index (CPI) increase of 1.98%, marking the highest level since early 2010 Consequently, the inflation rate for the entire year of 2010 reached 11.75% when compared to the CPI figures from December 2009 This trend aligns with the observed pattern of higher inflation rates during the beginning and end of the year.
In 2010, there was a notable disparity in the Consumer Price Index (CPI), with the highest month exceeding the lowest by over 1.5% The CPI rose in the first quarter, recording increases of 1.36% in January, 1.96% in February, and 0.75% in March However, it gradually declined to 0% over the next five months, before rebounding to over 1% and ultimately approaching nearly 2% in the last two years of 2010.
December, CPI was 1.98% which formed a trend of considerable increase in the fear of the inflation rate in the first months of 2011
Figure 2.4: Inflation in 2011 – Source: GSO
In 2011, the inflation landscape was complex, marked by a notable surge in the early months of the year However, during the last four months, the inflation rate stabilized, with an increase of less than 1% per month.
In December, the inflation rate surged, with the monthly Consumer Price Index (CPI) rising by 2.20% Following the Lunar New Year, inflation accelerated unexpectedly, peaking in April at 3.32%, exceeding the Congressional target of 7% Although there was a slight decrease to 2.21% in May, this still triggered panic in the stock market.
In June, Vietnam's Consumer Price Index (CPI) decreased to 1.09%, marking the end of a turbulent first half of the year However, inflation continued to rise, reaching a peak of 1.17% in July compared to the same period in 2010 Subsequently, the CPI increased by 0.39% in November 2011 and by 0.53% in December 2011.
To sum up, the inflation rate was up to 18.58% in 2011, with most increase in the price index of food items, housing, education and transportation
*The cause of inflation in 2010 and 2011
- The state set the economic development policy at a high level at all costs
On 8 th November 2010, the government set unrealistic development targets: 7% - 7.5% per year over the next five years and 7% -8% in the period from 2011 to
2020 Meanwhile, Vietnam's economy experienced the inflation rate of 11.75% in
2010, which was higher than it of all neighbor countries The state cannot aim at both a high level of economic development and controlling the inflation situation
To drive development, the government has strengthened public development programs in collaboration with businesses, resulting in a heightened demand for credit Consequently, it can be concluded that the prevailing inflation is primarily attributed to demand-pull factors.
- The rule of supply and demand relations according to season
In 2010, the Consumer Price Index (CPI) experienced notable fluctuations, particularly rising in early and late months, especially around the Lunar New Year and New Year's Eve This surge in CPI can be attributed to heightened consumer demand during the festive season, coupled with limited supply due to seasonal production constraints Notably, in December 2010, the CPI peaked with an increase of nearly 2%, driven primarily by a 3.31% rise in food and beverage prices, along with a significant 2.53% increase in housing and construction material costs.
In 2011, the Consumer Price Index (CPI) exhibited notable trends, marked by a significant price increase in January, peaking at 3.32% in April Additionally, the disparity between the highest and lowest monthly rates reached 2.96%, highlighting the volatility of prices that year Unlike previous years, where price fluctuations followed a predictable cyclical pattern, 2011 saw a sharp rise in the first quarter and mid-second quarter, followed by a pronounced slowdown in the latter months.
- The policy of education and some commodities prices
In September and October of 2010, the government authorized adjustments to tuition fees, leading many Provincial People's Committees to significantly raise these fees as the new school year began This surge in tuition costs contributed to a notable increase in the adjusted price index, reflecting the heightened financial demands on families for school supplies and education.
2010, school supplies and tuition fee were the highest commodity group, with an increase of 19.38%
In 2010, significant price adjustments were implemented for various commodities, including a rise in electricity prices starting March 1st, an increase in water prices, and three adjustments to gasoline prices, which surged to 16,400 VND, then 21,300 VND, and finally settled at 19,300 VND in 2011 Additionally, the prices of coal were raised, along with an increase in basic salaries.
Resolution No 11/NQ-CP, issued on February 24, 2011, permits the adjustment of domestic fuel prices to align with global oil prices and domestic electricity prices through market mechanisms Increases in electricity and gas prices impact all sectors of the economy and significantly contribute to rising inflation, illustrating a cost-push phenomenon.
- The impact of the world market
In the aftermath of the financial crisis and global economic downturn, numerous countries experienced rising public debt and unemployment, primarily due to the prolonged use of loose monetary policies aimed at stimulating their economies.
- Devaluation of VND, import and export
In 2010, the free market exchange rate rose by 10%, while credit institutions increased their rates by 5.9% The State Bank of Vietnam (SBV) adjusted the official exchange rate twice during this period, aiming to boost exports and reduce the trade deficit Overall, Vietnam devalued the VND four times, leading to a 20% decline in its value against the USD However, this devaluation exacerbated inflation, as the prices of imported goods and raw materials, calculated in VND, saw significant increases.
- The process of urbanization and infrastructure development
Urbanization and infrastructure development have led to a significant reduction in available land for housing projects, hotels, ecotourism, golf courses, industrial parks, and roads, consequently limiting agricultural production and decreasing the supply of agricultural products This trend, which has been ongoing for years, gained momentum in 2010, resulting in a notable impact on market prices.
The rising demand for construction has significantly impacted the prices of construction materials, particularly for imported items Notably, materials such as steel, cast steel, aluminum, and advanced glass have experienced substantial price increases.
- The impact of interest rate
Lending interest rates caused great difficulties in production and business operations of companies and people, putting a pressure on the price of materials, goods and services
- Changes in people's psychology and fluctuation in gold prices
SOLUTIONS AND RECOMMENDATIONS
Implementation of tight monetary policy
Inflation is primarily driven by various factors, with monetary issues being a significant contributor The continuous increase in the supply of money and outstanding credit plays a crucial role in inflation within our country In response, the government aims to strictly regulate payment methods and total credit The State Bank of Vietnam (SBV) employs flexible monetary policy tools based on market principles to address these challenges It is essential to balance the tightening of monetary policy with the need to maintain liquidity in the economy and support the operations of banks and credit institutions, which are vital for the growth of production and exports.
Active, flexible and efficient management of monetary policy tools, particularly interest rates and money supply, can control the inflation
The government adopts a flexible approach to managing the exchange rate and foreign exchange market, adapting to market fluctuations It enhances foreign exchange management and implements measures that enable organizations and individuals to buy and sell foreign currency through banks based on their legitimate needs This strategy ensures foreign currency liquidity and stabilizes the exchange rate, supporting stability, production growth, and the increase of foreign exchange reserves.
The government collaborates with the Ministry of Public Security, the Ministry of Industry and Trade, and local authorities to ensure adherence to foreign exchange and gold trading regulations They enforce penalties for violations and establish commendation systems for reporting infractions, while imposing strict legal repercussions for intentional breaches of these trading laws.
Reducing the public investments and recurrent costs, strictly controlling the
State budget investments and state-owned enterprise investments constitute approximately 45% of total social investment Reducing these investments is expected to alleviate demand pressure and address the imbalance between imports and exports, ultimately enhancing economic efficiency The government plans to define the specific proportions of investment capital and administrative costs to be cut, while directing ministries and localities to identify inefficient or unnecessary projects for appropriate adjustments This process will involve reallocating and balancing funds, as well as rigorously evaluating state-owned enterprise investments to eliminate inefficiencies.
Enhancing the oversight and regulation of tax collection is essential for combating tax evasion This involves prioritizing the resolution of existing tax debts, employing coercive measures to recover owed taxes, and minimizing the accumulation of new debts.
Leaders of enterprises, local governments, and organizations utilizing state funds must prioritize cost reduction for conferences, seminars, and business travel Additional expenses beyond the planned budget are prohibited, except in cases that adhere to policies addressing natural disasters or epidemics Any violations of these guidelines will face strict and immediate penalties.
To effectively reduce state budget over-expenditure, it is crucial to closely monitor the borrowing and repayment of foreign loans by enterprises, particularly short-term loans Additionally, a thorough examination of government and national debts is essential to ensure fiscal responsibility and sustainability.
A thorough evaluation of investments by corporations and state-owned enterprises is essential It is important to propose measures to the Prime Minister for addressing or eliminating projects that demonstrate inefficient investment, including those involving external investments.
Concentrating on the development of agriculture and industry, overcoming
Vietnam's growth potential is significant, especially following its accession to the WTO, which has accelerated foreign and private investment while expanding export markets To harness this potential, enhancing production is essential for achieving diverse efficiencies, such as increasing supply to both domestic and international markets, controlling inflation, and reducing the trade deficit, all while fostering economic growth without adverse effects To support this, the Government has tasked Ministers and local leaders with proactively addressing challenges related to capital, market access, and administrative procedures to promote production development.
Ensuring the balance of the supply and the demand for goods, boosting export, and reducing the excess of imports over exports
boosting export, and reducing the excess of imports over exports
Maintaining a balance between supply and demand for essential goods is crucial to avoid price fluctuations, speculation, and hoarding The Prime Minister and Ministers have engaged with industry associations and businesses in sectors like food, medicine, fuel, construction materials, and fertilizers to ensure a steady supply and price stability.
The policy implements a flexible exchange rate system with suitable margins that align with market supply and demand, aiming to manage inflation effectively while minimizing any adverse effects on exports and foreign currency conversion.
The trade balance serves as a crucial macroeconomic indicator, and an increase in the trade deficit poses a threat to overall economic stability To address this challenge, it is essential to implement effective strategies aimed at boosting exports In response, the government is undertaking significant measures to rectify the trade imbalance.
- SBV ensures sufficient capital to buy foreign currency from businesses that export products;
- Immediately removing the drawbacks of export credit in each particular case;
- Strongly reforming administrative procedures related to exporting activities to reduce costs for businesses, in order to improve the competitiveness of Vietnam export
To achieve a balanced relationship between supply and demand for essential goods, it is crucial to address challenges in manufacturing and trade promptly, thereby enhancing production and service delivery Regular monitoring of internal and external market changes allows for timely regulatory measures to stabilize the market and prevent speculation and price hikes Additionally, established procedures and principles for controlling the importation of goods, materials, and equipment for investment projects funded by the state budget, government bonds, or state-owned enterprises are essential for maintaining market stability.
It is essential to closely monitor the declaration and application of special preferential tariff rates under free trade agreements, as well as tax incentives in non-tariff zones Additionally, tariffs should be reduced on production inputs that cannot be sourced domestically, while export taxes should be increased on items that are discouraged for export, such as natural resources and raw materials.
The State Bank of Vietnam (SBV) guarantees an adequate supply of foreign currency for the importation of essential goods that local producers are unable to fulfill, while also limiting loans for the import of goods that are discouraged according to the Ministry of Industry and Trade's guidelines.
Provincial and city People's Committees, particularly in Hanoi and Ho Chi Minh City, are focusing on managing the production, storage, circulation, and distribution of essential goods like food and gasoline, while also enhancing price management and stabilization Meanwhile, economic groups, corporations, and state-owned enterprises are intensifying their equitization and restructuring efforts, alongside stringent control of production costs, to improve business efficiency and maintain reasonable pricing for goods and services.
Thoroughly saving in production and consumption
Wastage in production and consumption is prevalent in offices and units, leading to significant potential savings In response, the government has mandated state-owned enterprises to reduce administrative expenditures by 10% This initiative encourages all sectors to minimize expenses, particularly concerning fuel and energy, thereby alleviating demand pressure, reducing the trade deficit, and enhancing overall social production efficiency.
Ministries, agencies, and local organizations are enhancing their oversight of regulations aimed at promoting thriftiness and reducing waste They are implementing power-saving programs while encouraging businesses and individuals to utilize energy resources, such as electricity and gasoline, more efficiently Additionally, there is a strong emphasis on adopting high technology, green technology, and clean, energy-saving solutions.
Strengthening the market management and controlling the observance of
To mitigate the negative impacts of market volatility, it is crucial to prevent speculative practices that drive up prices of essential commodities like petroleum, steel, medicine, and food Additionally, measures must be taken to combat cross-border smuggling, particularly concerning petroleum and mineral resources.
Businesses across all sectors should consistently monitor retail prices within their networks and among retail agents The Government has instructed State-owned Corporations to lead by example in this practice and take responsibility for their retail operations Additionally, the Government has urged industry associations to engage actively in supporting policies aimed at stabilizing the market and prices.
Expanding the implementation of policies on social security
In response to rising prices impacting daily life, particularly for low-income individuals and workers, the government has implemented enhanced social security policies This includes a 20% increase in the minimum wage for employees in state-owned companies, armed forces, and political organizations, as well as adjustments for Vietnamese labor in foreign enterprises and international organizations Employees undergoing vocational training will receive a minimum wage at least 7% higher than the regional minimum Additionally, approximately 1.8 million retirees and social insurance beneficiaries will see a 20% increase in their allowances, alongside over 1.5 million contributors whose allowances will also rise by 20% from the current standard.
Recently, the Prime Minister promulgated Decision No 289 / QD-TT about some policies to support ethnic minorities, households of social policies, the poor and fishermen
The government has allocated rice from the national reserve to provide free assistance to victims of natural disasters Additionally, they are promoting national target programs and support measures for disadvantaged regions affected by these disasters It is crucial to establish effective mechanisms and evaluate their implementation to ensure that state assistance reaches those in need.
In challenging conditions, the nation has undertaken significant efforts to control inflation, stabilize the macroeconomy, and ensure social security Years of innovation have bolstered the country's potential, leading to political and social stability Under the Party's leadership and with the collective determination of the political system and various sectors, we are on track to achieve our goals of inflation control, macroeconomic stability, and social security insurance.
Sub-conclusion
There are many solutions to control inflation and improve the situation:
Inflation arises from various factors, with monetary issues being a consistent contributor In response, the government aims to rigorously regulate payment methods and overall credit levels Effective management of monetary policy tools, especially interest rates and money supply, is essential for controlling inflation.
To enhance economic efficiency, it is essential to reduce public investments and recurrent costs while strictly controlling state-owned enterprises' investments This approach can alleviate demand pressure and address the imbalance between imports and exports.
Focusing on the advancement of agriculture and industry is essential, as enhancing production serves as a fundamental solution to achieve diverse efficiencies, including effective inflation control.
To manage inflation effectively, it is crucial to balance the supply and demand for essential goods that are vital for production and daily life This balance helps prevent sudden price fluctuations, speculation, and hoarding.
The government has called on citizens to reduce their spending, particularly on fuel and energy, due to prevalent wastage in production and consumption within offices and facilities This initiative aims to alleviate demand pressure, decrease the trade deficit, and enhance social production efficiency.
The government is promoting the expansion of social security policies by raising the minimum wage for both domestic and foreign workers, while also providing support for ethnic minorities, families benefiting from social programs, and victims of natural disasters.
Vietnam has achieved encouraging results in controlling inflation through effective economic policies and strong government leadership, maintaining a reasonable inflation rate that supports current and future economic growth However, there remains an underlying threat that could suddenly worsen the inflation situation.
Recapitulations and concluding remarks
Inflation remains a significant and complex concern for scientists and society alike, as worsening inflation can disrupt economies and complicate social structures Controlling inflation is a challenging process that cannot be achieved overnight, as it is inherently tied to the monetary system and cannot be entirely eliminated Therefore, the key challenge for any nation is to implement effective measures that promote high and stable economic growth while maintaining inflation at a manageable level.
Vietnam's inflation situation has been complex, particularly during the economic and social reforms that followed the elimination of subsidies and bureaucracy Inflation poses a constant threat to the economy, necessitating careful government actions to ensure stable economic development This stability is crucial for advancing science, technology, and education, enabling Vietnam to compete with regional and global counterparts The country has made significant strides in controlling inflation, which lays a solid foundation for future economic growth.
Implication of the study
A healthy economy is characterized by a moderate inflation rate that remains below the economic growth rate To effectively manage inflation, stabilize the macro-economy, and achieve targets for growth and social security, it is essential for the state to enhance policies, regulations, and skills to address inflation driven by external factors While inflation often carries a negative connotation, it can also signify effective economic development, technological advancement, and a rapidly evolving economic structure Therefore, maintaining inflation at a balanced and acceptable level is crucial, as it can serve as a vital catalyst for the development process.
Limitation and proposal for further study
After conducting extensive research on inflation theory and its current status in Vietnam and globally, I've gained valuable insights However, my limited understanding of economics may lead to inaccuracies in my graduation thesis I would greatly appreciate any assistance in improving the quality of this work.