Consumer psychology drives up inflation

In certain countries, inflation often increases due to basic factors such as an imbalance between supply and demand as well as between money and commodities. However, another major factor causing soaring inflation in Viet Nam is the psychology of inflation expectations.

Viet Nam News Agency talks with economists about the issue.

Vu Dinh Anh from the Ministry of Finance

Vu Dinh Anh

Prices have risen due to enduring inflation which has devalued the Vietnamese dong against the US dollar, negatively affecting people's confidence in the local currency.

The psychology of inflation expectations occurs when people expect better results on the back of inflation control measures. It also occurs due to negative rumours related to the economy. Many producers and traders hike prices in advance as a "defence" measure against fluctuation of the inflation index.

Many people believe the rumours due to information remaining unclear. Most react based on their position as buyer or seller, employer or employee and consumer or producer.

For example, for goods under State management, if the Government decided to keep prices stable from now to the year-end, it must comply with its commitment. If the Government adjusts prices during this time, people start to lose faith.

In the case of petroleum, people are more interested in the transparency of business performance rather than price cuts or hikes. They want to know that petrol traders are losing or making profit. The Government needs to have reliable agencies in place to check the reliability and transparency of information related to business performance. This is the only way to create trust and minimise unreasonable price hikes.

As for goods which the State manages at set prices, the Government should strictly supervise its input costs in support of price adjustments.

The Government needs to make sure that businesses comply with its regulations. For example, children's toy businesses should be properly managed via agencies of science and technology as well as the market management watch in order to avoid causing health risks.

Hoang Cao Cuong from the University of Commerce

Hoang Cao Cuong

Psychology of inflation expectations affects consumption and distribution of commodities in the economy as well as many aspects of social life, especially the prices of goods.

Firstly, while State management policies are aimed at better running the economy, the mindsets of people cause of inflation expectations to rise.

Taking the salary hike as an example, wage increases do not affect prices. However, because of the psychology of lifting prices in business, traders often increase sale prices when they see that consumers have more money. Some traders make price hikes even when salary increases have not as yet taken effect, causing inflation to soar.

Secondly, people remain sensitive to inflation and often react excessively causing inflation to rise. Meanwhile, the Government's response against inflation is often slow and its execution policies are sometimes inconsistent, causing distrust. This has been evident in relation to the gold, dollar and real estate markets in which people rush to invest and speculate on the assets to replace the dong.

Thirdly, local people have a psychology of not speculating on the dong. Currently, the store of dong still makes people feel vulnerable and insecure. As a result, people have looked for other investment channels such as gold and the dollar.

Fourthly, local people have a psychology of depending on foreign currencies. Currently, domestic production mainly depends on imports. The country also imports many consumer goods. This means domestic prices have to depend on exchange rates.

When import prices and exchange rates change, it often leads to a domino effect, causing domestic prices to rise. — VNS