The poor’s nominal income does not rise as rapidly as the consumer price index. As a result, low-income families are extremely vulnerable to price hikes.

Soaring inflation has adversely affected low-income families, especially those who depend on wages and social aid, which are not adjusted promptly or indexed to inflation. A report by the Central Institute for Economic Management (CIEM) on the effects of inflation on the low-income group has offered more insights into this problem.

Given forecasts by the General Statistics Office (data were collected up to February 2011), it will be difficult to attain the National Assembly’s goal of reducing the share of poor families by 2 percentage points. When inflation hit 12.6% and 19.9% in 2007 and 2008 respectively, the share of poor families dropped by only 2.1 percentage points (from 15.5% to 13.4%). In 2004-2010, this figure dwindled by 1.25 percentage points per annum on average.

In other words, a consumer price index (CPI) increase of 11.9%, 13.1% and 13.9% this year will translate into a poverty reduction rate of 1.5, 1.3 and one percentage point respectively. This renders the National Assembly’s goal impossible (since the poverty reduction rate of 2% was based on a CPI increase of 7%). In fact, with CPI jumping by 3.32% in April and 17.51% year-to-date, the actual poverty reduction rate can be even more dismal.

In addition, according to CIEM, the real poverty line in 2011-2015 will fall by 7-8% (equivalent to VND300-400,000 per month) if CPI in 2011 is approximately 14%. However, as reality turns out to be even gloomier than expected, the extent to which the poverty line will really shrink is even more worrisome.

CIEM contends that some poor families have attained the near-poverty status in principle but not in reality. At present, Vietnam has 3.1 million poor households and 1.65 million near-poverty families. This means surging inflation will deal a severe blow to more than 4.7 million households that are perpetually grappling with woeful living standards.

Pronounced impacts

Higher agro-product prices will benefit cooking producers but spell trouble for low-income families that do not engage in food production. Dearer food is therefore a bane to 20% of poor families (with an average monthly income of VND400,000 in rural areas and VND500,000 in cities) as they spend more on this group of items (about 55.9% of their expenditure) than their richer counterparts do. Health care and education account for only 12.5% of the poor’s monthly bills. Farmers, who claim a lion’s share of poor families, will see their income sink if input prices (such as those of fertilizers) outpace output prices.

Meanwhile, low-income families in cities will also struggle since their wages and social aid are inadequately indexed to inflation. In 2006-2008, the 20% poorest households saw an average income increase per capita of some 22.15% per annum. Spending increase per capita, meanwhile, was approximately 27.7% per annum, exceeding income increase per capita by about 5.55%.

Another study on urban poverty (by Oxfam and Action Aid) also indicated the disparity between income increase and inflation (10-20% against 30-50%) exerted tremendous pressure on impoverished households in cities. As purchasing power plunges, most of the income generated is spent on food and other necessities; savings were therefore extremely low among the poor.

Famine will escalate as well and, in the first two months of 2011, jumped by nearly 100% year-on-year (838,600 people), something of a record since 2007. Again, food price hikes have been to blame. Soaring inflation, it seems, will only aggravate matters.

Consumers In the price storm

According to a recent survey entitled “The impacts of inflation on consumer behavior and sentiment” and conducted by FTA Market Research Co., 54% of the respondents were adversely affected by sustained price hikes.

The survey involved 600 respondents aged 18-50 and living in Hanoi (200), Danang City (200) and HCM City (200). The objectives were to assess the effects of inflation on consumers and to gather data on consumer perception of Vietnam’s socio-economic outlook. The insights gleaned will enable marketing professionals to adjust business strategies judiciously.

The survey report indicates that most respondents were extremely vulnerable to inflation (the figures for HCM City, Hanoi and Danang were 52%, 49% and 62% respectively). Up to 48% of those surveyed said they were partly affected and only 6% thought they were sheltered from the current price storms.

Some 47% expressed concerns about soaring food and power prices, 31% fretted the ongoing economic downturn and 28% worried about fuel prices. Surprisingly, only 10% were apprehensive about climate change and natural disasters. Consumers are increasingly pessimistic about the economy, with 48% and 36% saying that Vietnam’s economic outlook would remain the same or worsen.

Consumer behavior has changed, too, with most idle cash turned into bank deposits (40%) or used to purchase gold (31%). Respondents in Danang preferred buying gold to placing deposits at banks (48% against 33%). Many switched from modern sale channels (supermarkets and convenience stores) to traditional markets, where prices are lower. In particular, sale promotions were extremely enticing. Spending on non-essential items was slashed; in contrast, fast moving consumer goods, except confectionery, seemed to be more sheltered from the effects of belt-tightening.

In general, respondents reduced expenditures on tours, luxuries, fashion products, electronics, entertainment programs, phone calls and Internet services. Meanwhile, education, transport, food, water, electricity and health care were immuned to spending cuts, except in Hanoi, where all products were affected.

Source: SGT