Opinion divided on new inflation gauge

Businesses are keeping a nervous eye on inflation forecasts

The government said it had assigned the General Statistics Office (GSO) and the State Bank (SBV) to work out a more appropriate method of defining the country’s core inflation.
Previously, inflation was based on the consumer price index (CPI), a method that has been used over the last few decades.
“The core inflation reflects the long-term outlook for the consumer goods and services price indices,” said the head of the State Bank’s monetary policy department Nguyen Dong Tien.
“It eliminates the fluctuations caused by seasonal trends, as well as the fluctuations caused by transitory supply shocks,” he said.
“In comparison with the CPI-based inflation, the core inflation is characterised by a more steady course, so it can serve as a more effective and trustworthy analytical tool for macro-policy makers,” he said.
Inflation increased strongly in the first eight months of the year with the CPI-based inflation reaching 8.03 per cent by the end of August.
This is already way over the annual target of 5 per cent set by the government.
The State Bank, however, does not agree with the above figure, which was reported by GSO.
It was State Bank governor Le Duc Thuy who told local media a while ago that if the government applied the core inflation method, Vietnam would have an inflation rate much closer to 5 per cent.
While the government’s decision will no doubt satisfy international organisations like the International Monetary Fund (IMF) and the World Bank who have long insisted Vietnam should calculate inflation in a more standard way, it has met with differing opinions among the public at large.
It is suspected the decision by the government to introduce core inflation is a way of calming public anxiety over the possible inflation hike by the end of the year.
An IMF delegation visiting the country last week forecast that inflation for the whole year might hit double-digits, but a State Bank official dismissed these concerns.
“The plan to calculate inflation by this method has been nurtured and prepared by the government for a very long time,” said Nguyen Thi Thu, deputy director of economic analysis division of the State Bank’s monetary policy department.
“We decided to develop it now just because we feel it is high time for the country to have a correct method to calculate inflation, and therefore, to help the government manage its monetary policies better,” she said.
Thu added that it was not known when this method could be introduced since there were several difficulties that the working team had to address.
The first of which was to figure out what products or services can be excluded from the price basket in order to calculate the
core inflation.
The State Bank official pointed out that the general principle of core inflation was freeing the CPI index from certain unit prices of consumer goods and services.
This applies to goods or services that are characterised by strong disturbances – seasonal or supply related – or which, due to other reasons, are not relative.
However, each country, depending on their economic context, has their own way of defining the exclusion list of goods or services.
For example, the US excludes raw foodstuff and energy; while in Britain indirect tax is excluded and New Zealand chose to exclude interest from secured loans.
“For Vietnam, we are still working on which goods or services can be excluded,” Thu said.