Inflationary pressure unlikely to mount with latest base salary increases: expert

Vietnam's base salary has increased, but people should not be worried about psychological price hikes, and the inflation target of 4-4.5% in 2024 is completely feasible, said Nguyen Bich Lam, former chief of the General Statistics Office.

The monthly base salary for public employees in Vietnam increased 30%, from VND1.8 million ($70.7) to VND2.34 million ($92), starting July 1. This is the strongest increase in years after it was delayed due to Covid-19.

The pension level also rose by 15%, the highest ever jump. Meanwhile, the regional minimum wage for the business sector saw an average rise of 6%.

In the past 20 years, Vietnam has had 14 base salary hikes, of which two were accompanied by increased inflation. Specifically, in 2008, when the base salary increased by 20%, inflation surged from 6.3% to 23%, and in 2011, when the base salary rose by 13.7%, inflation increased from 9.2% to 18.6%.

This has led to concerns that the latest wage increase will lead to rising prices of essential consumer goods, affecting the inflation target of 4-4.5% in 2024.

Deputy Prime Minister Le Minh Khai said that the government has assessed the indicators and determined that the CPI is likely to increase by an additional 0.7 percentage points, while GDP growth could expand by an extra 0.21 percentage points in 2024 due to the base salary hikes.

"The CPI increase is mainly psychological, while the demand due to salary increases is also there but not high. Notably, supply and demand of goods are being fully met, especially essential goods," Khai emphasized.

Sharing the same opinion, Nguyen Bich Lam, former chief of the General Statistics Office, said that salary increases accompanied by rising prices were only really worrying in the context of more than 10 years when the market was mainly spontaneous.

In recent years, the government, the people and the market have adapted to such situations, thus they have not been affected much. In fact, many recent salary increases have not led to price hikes.

It should be noted that modern distribution systems such as supermarkets and shopping centers are developing strongly, and many grocery stores are also transforming to be more modern. These are places where prices can be managed.

"Strong discounts and promotions in Ho Chi Minh City and Hanoi, along with large distribution networks nationwide, will reduce the impact of increasing prices due to the psychology factor," Lam said.

Inflation target of 4-4.5% "completely feasible"

Recently released socio-economic statistics from the General Statistics Office show that the economic growth figure for the second quarter of 2024 was encouraging, up 6.93% over the same period last year. GDP in the first six months of 2024 increased by 6.42%. However, the CPI number is worrying.

Specifically, the average CPI in Q2/2024 rose by 4.39% over the same period last year. In the first six months of 2024, the CPI increased by 4.08%. Statistics show that the CPI increased faster in Q2, possibly exceeding the target set by the National Assembly.

Commenting on the above numbers, Lam remained positive about the country's ability to curb inflation in 2024. Loosened monetary policy, exchange rate fluctuations, and rising commodity prices on the world market will be the main factors creating inflationary pressure in the last six months of 2024.

Inflationary pressure is also being caused by domestic rice prices following rising export rice prices; rising electricity prices due to increased production costs and demand for production and consumption; increased prices of healthcare and education services; monthly base salary hikes for public employees starting July 1; and price increases during end-year holidays.

The Vietnamese dong might further depreciate against the U.S. dollar in Q3/2024 when the trade balance tilts towards a trade deficit in preparation for production and export activities at the end of the year. However, the Fed's reduction of interest rates will reduce pressure on exchange rates, Lam added.

Besides factors that create inflationary pressure, there are also factors that help curb inflation, including an abundant source of food that meets domestic consumption and export needs, and tax support policies such as environmental tax reductions on gasoline and VAT cuts, Lam highlighted.

As the government has experience in managing the prices of strategic goods and services while total consumer demand remains low, the target of controlling inflation in 2024 in the range of 4-4.5% set by the National Assembly is completely feasible, he added.