Aggregate demand surges, putting high pressure on inflation in 2022

	Experts raise concerns about imported inflation risk
	Online seminar held on "Inflation Control and Economic recovery and development"
	Tax exemption and reduction for petroleum need careful review

Online Seminar on “Inflation Control – Economic Development and Recovery”

Supply chain dislocation increases input prices

Commenting on factors that adversely affect the price level as well as inflation control in 2022, Mr. Nguyen Bich Lam said that the inflationary pressure in 2022 is very high, from many aspects.

The first factor is a surge in aggregate demand. After the pandemic is controlled, the aggregate demand began to rise, total retail sales in the first two months began to see positive growth while total retail sales in 2021 recorded negative growth.

In particular, in the next two years, the implementation of the economic support package and the surge in aggregate demand will also put great pressure on inflation.

The second factor is that Vietnam's economy heavily depends on imported materials. Currently, the world's aggregate demand is also increasing, resulting in the world’s material prices doubling from the beginning of the year.

"In the context that Vietnam's economy is heavily dependent on imports, world’s prices will increase import prices, which will affect input prices, creating cost-push pressure," said Nguyen Bich Lam.

The third factor is the domestic and international supply chain disruptions. This is also the cause of very high inflation in the world. For example, the supply chain disruption for raw materials and gas has caused inflation in Europe.

Economist Nguyen Bich Lam speaks at the seminar

To clarify the inflationary pressure from the price of petroleum and some other commodities, Mr. Lam said the price of petroleum has risen by 60% since the beginning of the year. This rise has put great pressure on the economy, because petroleum is the key raw material, affecting the prices of many other goods.

Besides, the world’s food prices have grown by 24% from the beginning of the year. The Food and Agriculture Organization of the United Nations (FAO) announced the highest price index ever in 60 years. The increase in the world’s food prices creates inflationary pressure, but also benefits Vietnam’s rice exports, said Lam.

He also mentioned another factor affecting inflation, that is, Vietnam has successfully controlled the Covid-19 pandemic, many businesses have been restoring operations, thus the labor shortage will also be a pressure factor to increase inflation, because businesses have to spend more money to attract, recruit and train workers.

If inflation surges, it will have a great impact on the economy, creating a new price level, said Lam.

Accordingly, investment and business decisions must be calculated on this new price level, which will raise input costs, reduces people's actual incomes, reduce purchasing power and reduce aggregate demand, strongly impacting on the economy.

Inflationary pressure from the economic support package is not a concern

Regarding solutions to control inflation, Mr. Lam said, in order to control inflation, the factors that cause inflation must be controlled.

“I think the first solution is supply because inflationary pressure this year comes from the lack of supply to meet aggregate demand, especially the supply of petroleum. If petroleum prices increase by 10%, inflation will increase by 0.36%, while from the beginning of the year the petroleum prices increased by 60%, showing how big the pressure is. In the first two months of the year, inflation rose by 1.68%, of which petroleum contributed 1.63%. Therefore, first of all, it is necessary to control the supply of raw materials, especially petroleum, which is an important factor," Lam said.

The second solution is the prevention of supply chain disruptions. For the domestic market, there must be solutions to ensure the supply of materials between regions and localities. Especially, maintaining the supply chain between the world and Vietnam, is a big challenge. In addition, financial and monetary policies must be managed flexibly.

Regarding the factors affecting inflation in 2022, the large-scale disbursement of the economic support package this year and 2023 also create concerns about the risk of inflation in 2022 and 2023.

Assessing this issue, Mr. Nguyen Bich Lam said that the economic recovery support package has many specific parts, which seem to create a massive money supply into the economy.

Mr. Lam said the 2% VAT reduction solution actually does not supply money to the economy at all, but reduces taxes and reducing budget revenue. Or the support package to compensate interest rates for businesses does not pump money into the economy.

According to Lam, with the economic support package, this is a solution that the Government, ministries and agencies have studied very carefully and have a plan to implement, thus, it is not a factor posing pressure on inflation, or if it is, when the aggregate demand surges, requiring a lot of materials, material prices will rise.

This price increase is from the supply of materials for the economy, rather than pressure from the money supply to the economy. Therefore, there must be a solution to ensure supply, not to disrupt the supply chain so as not to create inflationary pressure from this package.

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Lam affirmed that the implementation of the support package for economic recovery and development is very necessary; inflation pressure from the support package is not a concern.