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While it is encouraging to see slower growth in pork prices, soaring global grain prices are posing upside risks.

Consumer Price Surge in February Does Not Push Up Yearly Inflation, Economists Say
Photo: Nikkei
What happened in February? Deflation dissipated quicker than the market expected. Headline inflation rose 1.5% m-o-m in February (Chart 1). Although Tết distortion played a role, the main driver was a sharp increase in electricity prices. After a one-off electricity subsidy from Electricity Group Vietnam (EVN) in January, electricity prices jumped 20% m-o-m (GSO, 28 February 2021). 
Meanwhile, rising food prices and higher transport costs also helped to push up headline inflation. While electricity price volatility is perhaps a one-off administrative adjustment, food prices and transport costs are worth watching closely, as they both weigh heavily in the overall CPI basket, with weightings of 34% and 10%, respectively.
First, there is a mixed picture in the food category. Since the end of 2019, higher pork prices have pushed up food inflation, even to the extent that headline inflation temporarily breached the “4% inflation ceiling” for four consecutive months. However, pork prices have largely moderated, given gradually improving conditions since 2H20 and a 382% y-o-y increase in pork imports (VietnamPlus, 9 February 2021). 
The African Swine Flu (ASF) has caused the loss of about 6 million pigs in Vietnam, but the total number of pigs have increased to more than 26 million, equivalent to 85% of the pre-ASF level (source: UN FAO, 4 March 2021). If we smooth out Tết volatilities, pork prices only rose 0.7% y-o-y during the first two months of 2021, albeit from a high base (GSO, 28 February 2021).
While it is encouraging to see slower growth in pork prices, soaring global grain prices are posing upside risks. In the case of Vietnam, there has been a notable increase in the price of rice over the past couple of months, driven by several factors including seasonally tight supply and delayed harvest in parts of the Mekong Delta as a result of unfavorable weather conditions (source: USDA, 31 December 2020). 
That said, while grain food prices can be a source of concern, its CPI weighting is quite small (3.7%), thus the upside risk is likely to be limited. Overall, we expect food prices to moderate significantly after last year’s 10% y-o-y jump Another key supply-push concern comes from oil base effects. In Vietnam, the Ministry of Industry and Trade and Ministry of Finance usually reviews domestic petrol prices and makes adjustments in accordance with global oil price fluctuations every two weeks. In recent years, the correlation between local transport costs and international oil prices is increasingly evident, typically with the lag of about one month. 
Not surprisingly, domestic transport prices fell 11% yo-y, the main drag to headline inflation in 2020. That said, the dampening effect will eventually dissipate throughout 2021. As such, we expect some upside pressure from higher transport prices (HSBC forecasts a 34% increase in the Brent crude oil price to USD56/b in 2021). That said, this is likely to be offset by slower growth in food prices, given its smaller CPI weighting.
What about demand-pull factors? As Vietnam was one of the few economies that saw positive growth in 2020, its demand-driven inflation held up relatively well. Prices in baskets such as household equipment, education, and garments grew at a steady but slower pace in 2020.
Meanwhile, costs in entertainment have dropped, but this is expected as recovery in services have been lagging. While we expect domestic demand to improve in 2021, ongoing slack in the labour market should keep a lid on demand-side inflation. However, upside risk comes from healthcare costs. The government has been carefully balancing its reforms to liberalise healthcare costs by keeping inflation under control over the years. Since Vietnam has been facing upward food inflation pressure in 2019, healthcare costs have moderated sharply. Given still-elevated food prices and rising oil prices in 2021, subdued healthcare costs are likely to continue. That said, it remains an upside risk to our inflation forecast.

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