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The looming inflation storm

March 20, 2022

Consumers are seen in a supermarket in HCMC - PHOTO: ARCHIVES

As the military con0ict in Ukraine heats up, commodity prices are

spiraling up and this spike shows no signs of abating. In0ation has
been haunting many economies, and now the situation is going from
bad to worse.
Vietnam’s average consumer price index in the first two months of the
year grew 1.68% year on year. The impact on consumer prices may spread
slowly, but the target CPI of 4% for this year looks increasingly
unobtainable.

Global commodity prices rocket up

In the first week of March, the global prices of many commodities spiked
up, especially the energy group, with the coal price surging 75% and
crude oil 32%. The group of farm produce also followed suit, with wheat
rising 35% in price, corn 12%, milk, butter and sugar all going up 8%.

Metals also flew high, with palladium surging 28%, nickel 20%, aluminum
15%, and iron ore 15%. Precious metals like gold and silver rose by 9%
and 12% within a month, respectively, while lithium rose 29% in a month
and a steep 600% over the past one year.
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In the United States, the January inflation rose 7.5% year on year, which
was the highest since 1982, while the eurozone inflation in February was
5.8%. In the current context, higher prices of energy and other input
materials may push inflation out of control.

Groups of commodities like energy, housing and foodstu! always carry a

major weight in the basket of commodities used to calculate inflation.
Given the higher input prices, therefore, consumer prices can hardly be
sustained.

More worrisome still, when consumer prices go up, the demand for a pay
rise will also get more acute. The minimum wages in certain countries
have been revised up, and the demand for higher wages is also heating
up. Risks associated with the price-wage-price cycle are surfacing in many
countries. In France, for instance, some trade unions have taken to the
street demanding a pay rise for employees.

Inflation storm – what level?

Data from the General Statistics O!ice (GSO) shows the CPI in the first two
months of the year at 1.68%, with transport service posting a rise of 15%,
foodstu! 2.37%, and drink and tobacco 2.48%. As groups of dining-
foodstu!, housing-building materials, transport, and household
appliances account for a major share in the basket of commodities for
CPI, any rise in the prices of these groups will have a major impact on this
year’s inflation.
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Furthermore, a breakdown of Vietnam’s imports also implies a strong
influence on the CPI. For example, Vietnam imported iron and steel worth
up to US$11.76 billion in a year to January, and products made of iron
and steel US$5.2 billion. These commodities will impact on housing and
building material prices to a larger extent.

Vietnam also imports a sizeable amount of animal feed and materials,

with the latest data showing a value of US$4.91 billion; automobiles at
US$4.89 billion; crude oil at US$4.82 billion; oil products at US$4.11
billion; pharmaceutical products at US$3.99 billion; and corn at US$2.98
billion. All these commodities have a strong influence on the prices of the
local basket of commodities, and as such, the steep rise of global prices
will adversely a!ect the import prices in the coming time.

Reality shows that many global suppliers and traders have adjusted their
contracts or orders signed with partners. For those contracts already
signed, they may be forced to go through such deals and incur damages.
For new contracts, the valid period for o!ered prices will be shortened,
say, from one month to a week. Provisions in the contract can also be
amended to factor in the fluctuation of material prices.

The knock-on e!ect of rising prices may be relayed, but given the
connectivity between markets, the relayed has also been shortened.
Moreover, as market information is instantly updated, psychological
factors will a!ect prices ahead of time. Accordingly, enterprises will hold
back commodities, while consumers will stock up on goods as a hedge
against rising prices. The herd manner in many cases will aggravate the
situation if management agencies fail to give clear and consistent
messages.

The impact on consumers varies from one family to another due to

di!erent levels of income and spending, but low-income earners will feel
the pinch. Their savings can be erased when prices surge.

Statistical figures o"en come late and fail to mirror the current situation.
Only individual families and consumers can tell how inflation bites by
measuring the amount of goods and services they can buy with the same
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amount of money.

The inflation in the coming time can be scary, though statistical figures
cannot clarify it. More dangerously still, when inflation skyrockets and
prolongs, the economy will gradually turn dimmer, ushering in tough
macroeconomic policies.
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