Table of Contents

1. Critical review report: ‘Keeping inflation in the sweet spot’ ..............................................2

2. Appendices .........................................................................................................................6
3. References ...........................................................................................................................7
1. Critical review report: ‘Keeping inflation in the sweet spot’
Viet Nam Investment Review (May 20, 2021): Keeping inflation in the sweet spot

https://www.vir.com.vn/keeping-inflation-in-the-sweet-spot-84316.html

Viet Nam Investment Review: “Keeping inflation in the sweet spot” is a financial article
that analyses an inflation phenomenon in Vietnam. The article highlights that in first quarter
2021, Vietnam recorded lowest inflation during last five years from 2016-2021, and give some
forecast about inflation rate for the rest of 2021. The article successfully demonstrates the
primary reasons for Vietnam low inflation by using Heterodox school of business principles.
Even though, some statistics and forecasts of inflation are true to some extent, it is insufficient to
pattern the whole picture of inflation in this period due to lack of data and other decisive input
factors. Following the critical review below, this argumentation will be discussed in detailed.
First, we must notice that the author measures the inflation rate in Vietnam by using
Consumer Price Index (CPI). CPI is calculated as weighted average of the percentage price
changes for a specific basket of 12 subgroups of consumption expenditure products and services.
In Vietnam, the highest weighted contribution sets in this basket are Food and Non-Alcoholic
Beverages (33.56%); Housing, Water, Electricity, Gas and other Fuels (18.82%); Transport
(9.67%); Furnishing Household Equipment and Routine Household Maintain (6.74%); Education
(6.17%); Clothing and Footwear (5.7%). The article provides analysis and data of the 3 first
biggest groups, which in total accounts for 62.05% of CPI calculation. Since this article
discusses inflation as a process of continuously rising prices or falling value of money, it is
appropriate to use CPI to evaluate inflation through individuals and firms’ consumption in an
economy.
Second, the theory used to explain this inflation phenomenon is based on Heterodox
school of economics. As in the lecture of Dr. Nicholas, Heterodox economists argue that:
“Inflation is typically the result of increases in costs of production. It is only occasionally due
to an increase in aggregate expenditure”. It means that inflation can be measured via two
approaches, the former is an increase in costs of input factors leads to a rise in inflation, the latter
is via a rise of aggregate expenditure which occasionally lead to an increase in price. The first
part of this article presumes that the rise in total demand of some products and services positively
affect inflation, but as in second paragraph this element is insufficient to push inflation rise
significantly as other main factors pull CPI down. Therefore, total inflation of first quarter 2021
is the lowest one over last 5 years.
At beginning the article expresses that “In the first four months of this year, though there
has been a rise in prices of some items used to calculate CPI in Vietnam”. The author pointed
out this inflation in first quarter 2021 can be claimed to an increase in the aggregate of demand.
The author asserted that there is an increase retail and consumption service revenue which stood
at $73.9 million, higher 10% in comparison to the same period in previous last year. For this
Group assignment – Critical review: ‘Keeping inflation in the sweet spot’ | 1
reason, the prices of food stuff, catering services, gas and petrol also went up. As Heterodox
principles, if total demand rises, the inflation rise occasionally. The word “occasionally” means
this event is only occurs when an economy reaches full employment. Because at that time, the
economy is unable to increase outputs at the same time, therefore prices of goods and services go
up. Following the article of this author, the author simply mentions an increase of total demand
is main contributor to inflation but neglect to evaluate other factors such as capacity of economy,
cost of production, GDP, income, balance of payment, exchange rates. As a result, readers solely
picture Vietnam inflation is this period through one-dimension view over demand-pull
theoretical method.
However, in general, though price of some group of products and services in the CPI rise,
the total CPI of quarter 1 in 2021 still lowest in last five years. The article brings up an
alternative interpretation: “There have also been some major causes behind such an on-year
reduction”, which will be clarified in the subsequent part of this essay: The decrease of cost in
production, or price decrease in other subgroup of consuming products and services.

First-four-month CPI on-year since 2016 (percent)

1.41

4.8

2.8
1
2.71

4.9

0.89

0 1 2 3 4 5 6

2016 2017 2018 2019 2020 2021

Vietnam's inflation in the first quarter of 2021 reached 0.89% - the lowest rate since
2016.

Through this report of VIR, the inflation was affected by three core determinants:
electricity, transportation cost, and energy. VIR's report mentioned that Electricity of Vietnam
(EVN) reduced electricity prices by 5.88%, pulling CPI down by 0.19%. As a result of the
decrease in electricity price, total electricity gross output increased by 3.18% relative to last year
period. In particular, the contribution of industries in total consumption as follows: Construction
and industry (56.01%) and households (31.46%), agriculture, forestry, and fishery (accounting
for 3.97. In this report, the author concluded that the decrease in electricity resulted in the
decrease in CPI. However, the report did not specify electricity price in relation to manufacturing

Group assignment – Critical review: ‘Keeping inflation in the sweet spot’ | 2

factors and individuals’ expenditure. As recent report of EVN in 20201, the figures showed that
2020 EVN launched two reducing periods: the first stage is from Apr 2020 to Jun 2020, and the
second stage is from Oct 2020 to Dec 2020. The beneficiary groups this policy including (1)
households (10% discount of retail electricity price from level 1-4); (2) consumers in tourist and
accommodation sector is entitled for discount as manufacturing industries; (3) facilities in
service of COVID-19 prevention that buy power from EVN's units and power retailers (from 20-
100% depending on purpose that facilities are used for isolation and concentrated medical
examination suspected and infected patient or to examine, test and treat suspected and infected
patients with COVID-19. Even though there are also some reports confirmed that the change in
electricity prices does not significantly affect inflation, and using EVN as an indicator to
represent inflation of the economy is quite inaccurate, however these studies mainly follow with
Neoclassical principles (increasing in aggregate demand will impact to inflation). Nevertheless,
as can be seen from above data, discount policy in electricity price in first quarter of 2021 can be
seen as a contributor to keep low inflation. Within the content of this article, recalling to
introduction part in which author is using Heterodox approach, electricity can be considered as
an input factor of many industries and also the economy, and has direct and indirect impact on
price level.
In addition, the above report of VIR points out that another reason for the lowest inflation
in first quarter over five-year period lies in the downturn in transportation costs. The Vietnam
Railways Corporation, airlines, and tour operators have launched various discount programs,
specifically, the report shows that compared to the same period last year: Train fares, airfares,
and package tours went down by 7.4%, 17.4%, 3.32% respectively. People's demand for travel
and tourism decreased sharply due to the covid19, while the supply curve remained unchanged,
forcing prices to decrease, and stimulating travel and tourism activities. Declined transportation
costs not only boost purchasing power in tourism sector but also lower production cost. As a
result of declined transportation cost, it can cause production cost decrease. By this way, it partly
lower inflation in this period. However, this reduction only has a minor effect on inflation in first
quarter 2021 since this periodical decline in transportation cost mainly serves to boost demand of
tourism activities rather than supports manufacturing areas.
In the next section of the report, the author argues that rising oil prices on the back of
global economic recovery is expected to shift inflation up to 3.8 percent this year and 4 percent
in 2022 (sourced from an ADB report on Vietnam's economic outlook). Petroleum plays a large
role in the basket of goods to calculate CPI and petrol is also an important input that significantly
affects many other industries and services, especially in the transportation sector because
currently, the cost of petrol accounts for 30-35% of transportation costs. In addition, the world
oil price is listed in USD, so fluctuations in USD price also affect the world oil price. For
example, if the dollar value increases by 10%, other things being equal, the price of oil will
1
https://en.evn.com.vn/d6/news/EVN-urgently-implemented-electricity-price-reduction-and-electricity-bill-
reduction-for-the-second-time-to-electricity-users-affected-by-COVID-19-pandemic-66-163-2085.aspx
Group assignment – Critical review: ‘Keeping inflation in the sweet spot’ | 3
decrease by 10%. So, according to the basis of Heterodox theory, the impact of imported oil
prices on inflation is completely reasonable. In first quarter 2021, exchange rate between USD
and VND was stable, therefore, a rise in oil products led to an increase in transportation and
logistics cost so oil price and Vietnam’s inflation are in positive relationship. Without the
government’s subsidies, any increase in oil price will result in a rise in inflation.
VIR's report has given numerous numbers to prove that the inflation in the first quarter of
2021 increased least in the past 5 years, but the report is not successful in predicting inflation in
the next period. The report states that the International Monetary Fund (IMF) forecasts that
Vietnam’s inflation in 2021 is at only 2.4% but there is no valid explanation to support this
forecast. Also, the report has not analyzed other factors affecting inflation such as increasing
logistic cost, money source, social situation, etc. From now to the end of the year when countries
accelerate COVID-19 vaccination rollout, the world economy recovery leads to an increase in
the demand for goods and services. In addition, the government and central banks in advanced
nations, especially in US, injected billions of dollars to support citizens during the epidemic as
well as prevent economy recession. Whereas the aggregate demand increase, level of production
requires time to caught up with this trend so it can place pressure on Vietnam’s inflation.
In summary, the article successfully to identify that the low inflation in 1 st quarter 2021 in
Vietnam over last 5 years is due to lower cost of production as in Heterodox economic point of
view. The article also gives general forecast about inflation for the rest of 2021 based on the cost
of imported oils, which we think it is reasonable. One thought I had in writing this review is that
author should analyses more details some other factor such unemployment, balance of payment
and exchange rate to help readers to pattern the whole picture of inflation whether the aggregate
of demand can really impact negatively to inflation or not. The forecast of inflation also should
add more data and input scenarios, for example the impact of Covid-19 to inflation if the
pandemic continues spread. An investor may use this article to have brief view but for a serious
investing decision we think that he need to dig more information and studies as we have just
mentioned.

Group assignment – Critical review: ‘Keeping inflation in the sweet spot’ | 4

2. Appendices

Report: Keeping inflation in the sweet spot

The government will attempt to successfully control inflation this year with demand
potentially failing to fully recover, despite a rise in local consumption.

According to the General Statistics Office (GSO), the Vietnamese government has so far
succeeded in reining in inflation and this effort is expected to continue until the year’s end as
domestic consumption remains feeble due to negative impacts of the global health crisis.
In the first four months of this year, the consumer price index (CPI) increased 0.89 per cent on-
year, also the lowest rise in the first four months since 2016. Specifically, the first-four-month
rate was 1.41 per cent in 2016, 4.8 per cent in 2017, 2.8 per cent in 2018, 2.71 per cent in 2019,
and 4.9 per cent in 2020.
In the first four months of this year, though there has been a rise in prices of some items
used to calculated CPI in Vietnam, such as foodstuffs (0.2 per cent on-year), catering services
(2.07 per cent), gas (14.69 per cent), and petrol (2.49 per cent), such a price hike was small as
compared to the same period last year, when COVID-19 began to attack the economy.
The period saw total retail and consumption service revenues hit nearly VND1.7 quadrillion
($73.9 billion), up 10 per cent over the same period last year when the rate declined 2.8 per cent
on-year.
“Despite a rise in local consumption, it remains weak and has yet to fully recover, and this has
failed to significantly increase the first-four-month CPI,” said a GSO expert. “There have also
been some major causes behind such an on-year reduction.”
Since last year the government has been deploying support solutions for individuals and
enterprises hit by COVID-19. For example, state-owned Electricity of Vietnam (EVN) has
reduced power prices for its customers. The average electricity price in the first four months of
2021 fell 5.88 per cent on-year, leading to a 0.19 per cent reduction in CPI.
However, despite the move, EVN has reported that all of its activities increased on-year in the
first quarter of 2021.The group’s total gross industrial output is estimated to be VND52.83
trillion ($2.3 billion), up 3.18 per cent on-year.

Group assignment – Critical review: ‘Keeping inflation in the sweet spot’ | 5

 Commercial electricity totalled 50.79 million kilowatt hours, up 3.18 per cent. In which,
electricity for agro-forestry-fishery accounts for 3.97 per cent of total electricity consumed, while
the rate is 56.01 per cent for construction and industrial activities and 31.46 per cent for
households – all up against the same period last year. Notably, EVN’s total revenue from power
sales is estimated to be over VND94 trillion (over $4 billion), up 4.11 per cent on-year.
Another cause behind a reduction in first-four-month CPI in Vietnam is that state-owned
Vietnam Railways Corporation, airlines, and travel firms have launched price discounts to
stimulate travelling and tourism activities. For example, the ticket price for trains since early this
year has decreased on average 7.4 per cent on-year, while the air ticket price has also dropped
17.4 per cent on-year, and full-package tours’ average price has also followed suit, at 3.32 per
cent on-year.
The Asian Development Bank (ADB) has praised Vietnam’s efforts to control inflation,
saying that in the first quarter of 2021 it slid to its lowest level since 2016 due to lower transport
costs and subdued demand. “But rising international oil prices on the back of global economic
recovery and increased domestic consumption are expected to edge inflation up to 3.8 per cent
this year and 4 per cent in 2022,” read an ADB report on Vietnam’s economic outlook.
The International Monetary Fund (IMF) also forecast that the inflation for 2021 in Vietnam may
be only 2.4 per cent.
“Inflation continued to be well contained at 3.23 per cent, below the authorities’ target of 4 per
cent in 2020,” said an IMF report also on Vietnam’s economic prospects. “Authorities have set
the targets for GDP growth of 6.5 per cent and inflation at around 4 per cent in 2021 in line with
the goals set in the national Socioeconomic Development Strategy for 2021-2030.”

By Dat Nguyen
3. References

https://en.evn.com.vn/d6/news/EVN-urgently-implemented-electricity-price-reduction-
and-electricity-bill-reduction-for-the-second-time-to-electricity-users-affected-by-COVID-19-
pandemic-66-163-2085.aspx (Accessed on 23 Jun 2021).
https://data.imf.org/?sk=4FFB52B2-3653-409A-B471-D47B46D904B5 (Accessed on 23
Jun 2021)
Bui Thi Kim Thanh (2008): Inflation in Vietnam over period 1990-2007, Institute of
Social Studies, The Hague, The Netherlands
Nicholas, H. (2021) ‘Basic economics’, PowerPoint lecture notes, Lecture 8-9-10, ISB,
Ho Chi Minh City, Vietnam.

Group assignment – Critical review: ‘Keeping inflation in the sweet spot’ | 6