Vietnam’s economy has the companions of inflation and growth for the first time in about 10 years, as the consumer price index (CPI) is lower than economic growth. This is good news for the economy and the business community of Vietnam in the early days of 2015.

 

CPI rose by 4.09 percent in 2014. It was quite surprising because CPI did not climb in last months of the year as usual, slight drops were even seen in the months near the Lunar New Year - the biggest shopping season of the year.

 

Happy about low inflation

CPI growth was lower than GDP growth. Trade ended the year in a surplus. The companion of CPI and GDP is rare as the economy was trapped in the vicious circle of growth - inflation - tightening - weakening - easing - growth – inflation.

 

With the CPI growth of 4.09 percent in 2014, Vietnam has more ground for slashing interest rates - a move seen to be effective for boosting production and stimulating social consumption.

 

Low inflation also encourages people to spend their money on business or deposit banks rather than rest in real estate or gold. A huge amount of money will be spent on investment, thus boosting employment and income for people. More abundant money deposited at banks and lower borrowing costs will be a facilitating factor for businesses to access capital, drive up growth, enhance performance, increase sales, reduce inventories to increase capital turnover and cut down bad debts. This will also pave the way for commercial banks to speed up credit growth.

 

Another positive factor is the consumer sentiment is calmer and more stable. After many years, inflation was curbed and tended to decrease. Consumers did not increase purchasing to store for holidays and they weighed up more on their spending. The change of consumer psychologies and behaviours inhibited suppliers of goods and services from raising prices before, during and after the Lunar New Year or major festivities as in previous years.

 

Low CPI growth is a joy for consumers, especially the poor, the unemployed and low-income earners. Although their income has not improved, their actual livelihoods are not much affected by consumer prices.

 

Increased purchasing power for people

The December CPI fell 0.24 percent over November. So, CPI was not only lower in months with strong growth rates in many previous years but also lower than in the first two months of the year. This development was rarely seen in many years.

 

Remarkably, in the latest 10 years, there were only two December CPI drops against November, with another one in 2008. In 2008, global prices spiralled up on widespread economic crisis. Hence, prices dropped towards the end of the year. Vietnam’s CPI in December 2008 fell up to 0.68 percent against November because the prices of some essential commodities plunged steeply. In 2014, without major impacts from the world, domestic prices still slid towards the year’s end.

A lot of explanations have been given for CPI decline in 2014, mainly low cost inputs, world oil price plunges and fewer natural disasters.

 

The weak aggregate demand was also a reason. The economy still in difficulty, increasing corporate bankruptcies and unimproved incomes of people portrayed a blur picture of domestic consumption. Total retail sales increased 6.5 percent in 2014, lower than expectations. High inventories also dragged on prices, leading to little-changed CPI.

 

Domestic consumer prices were considered pricey and distribution stages were backward with high costs while people’s incomes were slowly improved. However, a report by the National Financial Supervisory Committee said that aggregate demand will recover in 2015 as consumption revives on low inflation in 2014, thus helping improve purchasing power.

 

The world economy has clearly entered a period of recovery and was forecast to have optimistic growth. In 2015, Vietnam’s market prices will follow more closely to global prices of materials and fuels. Domestic policies will also have big impacts on CPI like the change in prices of goods imposed by State regulations like coal, petroleum, medicine and education. In 2015, electricity prices, hospital fees and education tuitions are likely to be placed under market price mechanism. If the Government does this, CPI in 2015 is forecast to jump high, not stay as low as in 2014.