Inflation risks caused by rising fuel prices

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Industrial production in Vietnam has increased sharply, equivalent to the pre-pandemic rate. Illustrated Photo: H.Diu

According to the report, Vietnam’s economy maintained strong recovery momentum despite of increasing global uncertainties related to the war in Ukraine, rising commodity prices and supply chain disruption caused by social distancingto control the Covid-19 pandemic in China and the tightening of global financial conditions.

The industrial production index in May in Vietnam rose by 10.4% year-on-year, equivalent to the pre-pandemic rate. The Manufacturing Purchasing Managers' Index (PMI) jumped from 51.7% in April to 54.7% in May - the highest level in the past 12 months, indicating stronger growth in industry.

However, the production of machinery and equipment decelerated from the growth rate of 26.6% (year-on-year) in March to 6.1% in April, and only 3.7% in May. According to the World Bank, this slowing trend may be related to supply chain disruptions and a lack of imported input materials due to China's blockade to control the Covid-19 pandemic.

Regarding import and export, after three months of acceleration, export growth decreased from 25.2% (year-on-year) in April to 18.0% in May, while the import growth continued to be on the horizontal axis. The export growth slowed down mainly due to a slowdown in phone exports, however, the exports of computers and electronics accelerated.

The World Bank’s report also said that inflation in Vietnam has gone up but is still significantly lower than its target of 4%. In particular, production price inflation showed signs of cooling down, with the lowest increase in input costs and output in the past three months.

However, World Bank experts still warned that authorities must be aware beware of inflation risks due to rising fuel prices and imported material prices, which may hinder the recovery process of domestic aggregate demand recovery. Temporary support measures should be considered to help poor households cope with rising fuel prices.

Since the world commodity price-shock can mainly affect petroleum, given by spillover effects increasing transportation costs, temporary and targeted subsidy policies for the main petroleum users (such as truck drivers) are another measure that should be considered to reduce difficulties and limit inflationary pressures.

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The World Bank also recommended the Government encourage investment to help increase the total supply. The production and use of alternative energy is likely to reduce the economy's dependence on imported fuels in the medium term and promote green growth.