Vietnam inflation continues to soar

May 27, 2008, 3:31 GMT

Hanoi - Economists and financial officials worried Tuesday that Vietnam's inflation rate is worsening despite government measures to slow it, as new figures showed the consumer price index rose 3.9 per cent in May, the highest one-month increase since 1995.

May's price hikes brought Vietnam's year-on-year inflation rate since May 2007 to 25 per cent. Officials were optimistic that government policies to fight inflation were already taking hold when inflation dropped to 2.2 per cent in April, but the new figures dashed those hopes.

'The government's measures to contain inflation have not proved to be effective,' said Le Dang Doanh, a senior Vietnamese economist and former adviser to the Prime Minister's office. 'I think the situation will remain very complicated in the coming months.'

The government has tried to slow growth in credit and in the money supply by raising banks' deposit requirements, requiring them to buy government bonds, and removing caps on interest rates. Prime Minister Nguyen Tan Dung has called on state-owned companies to pare back unnecessary borrowing and spending, but it is not clear how much effect those calls have had.

In March, the government froze the prices state-owned firms can charge for a number of key commodities, including coal, steel, and electricity. This month the government announced it was continuing price caps on gasoline, which the government spends some 60 million dollars a month to subsidize.

'It's going take a while for the policies to have some effect,' said Jonathan Pincus, senior economist at the United Nations Development Programme's Hanoi office. 'Clearly we're still moving in the wrong direction, but that's not unexpected.'

Pincus said he had not yet seen a breakdown of the inflation rate by sector. He said if inflation were mainly driven by rising food prices the situation might be less serious, as such inflation could reflect hoarding and speculation which would dissipate once the next rice harvest comes in.