Inflation and gasoline rates

DNHN - In the first three weeks of July 2022, the market saw three consecutive declines in domestic gasoline and oil prices, lowering each litre of RON 95-III by 6,800 VND to 26,070 VND/litre; E5 RON 92 by 6,230 VND to 25,073 VND/litre; and diesel oil by 5,160 VND to 24,858 VND/litre...

This price reduction was agreed upon by the public, bringing new expectations to the people and the business community, production and business households; at the same time, demonstrating the National Assembly and the Government's efforts to accompany and handle quickly, decisively, responsibly, and effectively, particularly in lowering the environmental protection tax rate to control inflation and remove socio-economic difficulties for production and business.

The fact also illustrates that as the price of gasoline rises, the price of transportation and vital items rises swiftly and forcefully, driving the CPI up in the same direction as the speed and extent of the rise in fuel prices.

This is because companies and sellers often actively modify the cost of products and services in response to the fluctuating price of gasoline. As a result, many other goods' prices are raised to retain their respective marginal profits while simultaneously gaining extra potential profits...

In contrast, the song is unlikely to assist establish wage prices by lowering oil prices while immediately lowering transportation expenses and manufacturing and economic activities related to petroleum use, such as fishing and power generation. 

In reality, the price of live pigs supplied to families and farmers climbed in July 2022, bucking the declining trend in oil prices. Many local, live pigs are available, with prices peaking at 70,000 VND/kg. 

The delay in price reductions for these goods and services is due, in part, to differences in the cost structure of goods and services; another reason is that enterprises and business households require time to adjust production costs, salary costs; working on distributing consciousness, ownership benefits, and social responsibility from sellers and producing and providing services and goods associated with oil; and a lack of appropriate state management mechanisms and incompatibility.

All of this causes the selling price of products and services to rise swiftly, closely following the attitude of rising oil prices, when it returns to be delayed in lowering the selling price of these commodities to attempt to capture more unique opportunity gains...

Petroleum is a strategic commodity that plays a crucial role in managing inflation, stabilizing the macro economy, encouraging economic development, and maintaining social order.

Every time the price of gasoline rises, it raises the input costs of businesses and the products and services offered in the market, either directly or indirectly. These expenses are immediately passed in, raising production costs and, as a result, raising retail prices for products and services delivered to the market... Overall, it will boost the social price level and enhance the economy's cost-push inflationary pressure.

Moreover, an increase in gasoline costs boosts people's transportation and personal travel expenditures, lowering demand for other social goods and services, while increasing product and service consumption reduces the society's collective desire for solvency.

This immediately reduces consumption, shrinks the local market, and slows economic development. Even if it is continued on a broad scale, it may result in stagnating inflation, increasing efforts to maintain social security, and undermining government legitimacy, consensus and order, stability and social determination at both the micro and micro levels, in the short and medium term...

The reduction in gasoline prices will directly help transport enterprises cut production costs and reduce the cost of transporting input materials, thereby helping to reduce production costs and increase corporate profits; contributing to reducing cost-push inflation pressure and reducing inflation expectations of the economy, expanding aggregate demand for non-petroleum spending, creating more jobs, and improving people's living standards, particularly for workers, thereby helping to reduce production costs and increase corporate profits.

To alleviate the negative impact of rising gasoline prices, assist enterprises in proactively calculating the cost of gasoline and oil for production and business, lessen the pressure of gasoline expenditure in people's consumption structures, and avoid surprises.

To increase cost-push inflation, the government and relevant ministries must proactively forecast and determine the petrol price threshold to control domestic petrol prices from exceeding this threshold and moving towards the target inflation in the planning period; proactively and diversify channels of exploitation and import of cheap petrol and oil; flexibility in using tools to reduce import tax, excise tax, and value-added tax for petroleum business; at the same time, the government and relevant ministries must proactively forecast and determine the petrol price threshold to control domestic petrol prices from exceeding psychological misdirection to the economy causes expectations and inflation.

According to IMF estimations, every 10 USD/barrel rise in oil prices reduces global economic development by 0.5 per cent each year. According to the General Statistics Office, when the price of raw materials rises by 1%, the price of output goods rises by 2.06%, indicating an increase in economic inflation.

Specifically, a 10% rise in fuel costs reduces GDP growth by 0.5 percentage points and inflation by 0.36 percentage points. Assuming that all other macroeconomic parameters and the global gasoline price stay constant, the 4.31 per cent decrease in gasoline price on 11/7/2022 will cut CPI by 0.16 percentage points in July 2022 compared to the previous year.

In 2022, the majority of the world's economies will face simultaneous convergence of all four forms of inflationary pressures to varying degrees (currency inflation, cost-push inflation, demand-pull inflation, etc... and imported inflation). Vietnam, as a very open economy, is no exception to the overall trend, and maintaining inflation under the 4 per cent 2022 objective established for the second half of 2022 would be extremely difficult.

According to the IMF's most recent prediction, Vietnam's inflation would rise by 3.9 per cent in 2022. According to Standard Chartered Bank, Vietnam's inflation would surpass the National Assembly's objective of 4% in 2022 and may reach 5.5 per cent in 2023. According to BIDV Securities (BSC), if the average oil price in 2022 is 80 USD/barrel, Vietnam's inflation in 2022 will be 4.5 per cent; if the oil price remains over the 100 USD/barrel level, inflation would be 5.1 per cent.

As a result, one of the objectives in Vietnam's primary emphasis for both 2022 and the future is to continue developing the fuel price control mechanism based on combining the State's hands and the market's hands.

Dr Nguyen Minh Phong