MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY

Lâm Minh Minh

THE EFFECT OF
OIL PRICE TO INFLATION IN VIETNAM
MASTER’S THESIS
In
Financial and Banking Ology code: 60.31.12
Supervisor
Dr. Nguyễn Thu Hiền

Ho Chi Minh City 2010


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ACKNOWLEDGEMENT
This research would not have been possible without the support of many
people. Firstly, I wish to express my deep sincere gratitude to my supervisor
who is also my instructor, Dr. Nguyen Thu Hien (Vice Dean, School of
Industrial Management, University of Technology) for her invaluable advice
and helps. Without her, this thesis could not have been completed.
Special thanks to my professors who are in university of economics
HoChiMinh city and Dr. Cao Hao Thi in university of Technology
HoChiMinh city without whose knowledge and assistance this study would
have been successful.
My thanks would also go to all of my classmates, my colleagues for all
of their friendship and encouragement.

Finally, I would like to express my deepest gratitude and honour to my
dear parents for not only the love they devote to me but also for the time I
took from them which should have been my devotion to them in their aged
time. My greatest thanks would go to my family, their encouragement give a
power to finish this research.

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ABSTRACT
This study analyses the oil price – inflation relationship by means of
analysing the impact of oil prices on consumer price index - CPI in Vietnam
using monthly data for the period of Jan 1995 – Nov 2010.
This study reports on the research results by testing the model of relationship
between three main factors as global oil price, domestic oil price and
Vietnam’s CPI through using three main testings as stationarity test,
cointegration test and causality test. That testings is collected based on the
testing of many previous researches that post on website of science direct.
The study may also provide some equation to quantify their relationship such
as the impact of global oil price to domestic oil price, the effect of domestic
oil price to CPI and the effect of global oil price to CPI with the purpose of
forecasting work.


Key word: oil price, inflation, CPI, the impact of oil price.


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TABLE OF CONTENT
ACKNOWLEDGEMENT.......................................................................................I
ABSTRACT............................................................................................................II
TABLE OF CONTENT........................................................................................III
LIST OF FIGURE.................................................................................................VI
CHAPTER 1: INTRODUCTION...........................................................................1
1.1 - INTRODUCTION...............................................................................................1
1.2 - RESEARCH BACKGROUND..............................................................................1
1.3 - RATIONALE OF THE RESEARCH.......................................................................2
1.4 - RESEARCH OBJECTIVE....................................................................................3
1.5 - SCOPE AND METHODOLOGY OF THE RESEARCH.............................................3
1.5.1 - Scope of Research...................................................................................3
1.5.2 - Research Method....................................................................................4
1.6 - STRUCTURE OF RESEARCH.............................................................................4
CHAPTER 2: LITERATURE REVIEW...............................................................5
2.1 - INTRODUCTION...............................................................................................5
2.2 - TRANSMISSION CHANNELS OF OIL PRICES.......................................................5
2.2.1 - First-round effect....................................................................................6
2.2.2 - Second-round effect.................................................................................7
2.3 – PREVIOUS RESEARCHES.................................................................................8
2.4 - CONCLUSION................................................................................................10
CHAPTER 3: METHODOLOGY........................................................................11

3.1 - INTRODUCTION.............................................................................................11
3.2 - BUSINESS RESEARCH....................................................................................11
3.3 - RESEARCH DESIGN.......................................................................................12


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3.3.1 - Research Hypotheses:........................................................................... 13
3.3.2 - Draft of Research Model:...................................................................... 15
3.4 - RESEARCH MODEL....................................................................................... 15
3.5 – OVERVIEW DATA...................................................................................... 21
3.5.1 – HISTORY OF WORLD OIL PRICE................................................................. 21
3.5.2 – INFLATION OF VIETNAM............................................................................ 25
3.5.3 – Oil price of Vietnam:............................................................................ 29
3.6 – CONCLUSION............................................................................................. 31
4.1 - INTRODUCTION........................................................................................... 32
4.2 - DATA DESCRIPTION................................................................................... 32
4.2.1 Global oil price..................................................................................... 33
4.2.2 Domestic oil price in Vietnam.............................................................. 33
4.2.3 Consumer price index.......................................................................... 34
4.2.4

Exchange rate in Vietnam.................................................................. 35

4.3 - TESTING CORRELATION BETWEEN VARIABLES....................................... 36
4.4 - TESTING STATIONARITY............................................................................ 39
4.5 - TESTING COINTEGRATION........................................................................ 42
4.5.1 - Relationship between global oil price and domestic oil price............42
4.5.2 - Relationship between domestic oil price and CPI.............................. 44

4.5.3 - Relationship between global oil price and CPI of Vietnam...............45
4.6 - TESTING CAUSALITY................................................................................. 46
4.6.1 - Causality test for WO – DO................................................................ 47
4.6.2 - Causality test for DO – CPI............................................................... 48
4.6.3 - Causality test for WO - CPI............................................................... 49
4.6.4 - Causality test for WOEX - CPI.......................................................... 50
4.7 - FINDINGS AND CONCLUSIONS................................................................... 51
CHAPTER 5: CONCLUSIONS AND IMPLICATIONS...................................53



5.1 - INTRODUCTION..........................................................................................53
5.2 - CONCLUSIONS OF THE RESEARCH............................................................53
5.2.1 - Summary of hypotheses and results...................................................53
5.2.2 - Conclusion.........................................................................................54
5.3 - IMPLICATIONS OF THE RESEARCH............................................................55
5.4 – LIMITATIONS.............................................................................................56
LIST OF REFERENCE........................................................................................58



List of Figure
Figure 1.1 – Outline of chapter 1...................................................................1
Figure 1.2 – Structure of the Research..........................................................4
Figure 2.1 – Outline of chapter 2...................................................................5
Figure 3.1 – Outline of chapter 3.................................................................11
Figure 3.2 – Research Design......................................................................13
Figure 3.3.1 – Transmission Channels of Oil Price.....................................14
Figure 3.3.2 – Original Research Model.....................................................15
Figure 3.4 – Research Model.......................................................................17

Figure 3.5 – Crude Oil Prices 1869-2009....................................................22
Figure 3.6 – Crude Oil Prices 1947 – 2009.................................................23
Figure 3.7 – CPI of term end and average 1992 – 2010..............................27
Figure 3.8 – Gasoline R92 Retail’s Price in Vietnam..................................29
Figure 4.1 – Outline of chapter 4.................................................................32
Figure 5.1 – Outline of chapter 5.................................................................53
Figure 5.2.1 - Summary of hypotheses and results.............................................54



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List of Table
Table 4 – Descriptive Statistics.......................................................................32
Table 4. 1 – Correlations Matrix......................................................................38
Table 4. 2 – Testing the stationarity of variables.............................................39
Table 4. 3 – Testing variable of first difference...............................................39
Table 4. 4 – Testing variable of second difference..........................................40
Table 4. 5 – Model Description (CPI).............................................................40
Table 4. 6a – Model Summary........................................................................42
Table 4. 6b – Coefficients...............................................................................42
Table 4.7a – Model Summary.........................................................................43
Table 4.7b – Coefficients................................................................................43
Table 4.8a – Model Summary.........................................................................44
Table 4.8b – Coefficients................................................................................44
Table 4.9a – Model Summary.........................................................................45
Table 4.9b – Coefficients................................................................................45
Table 4.9c – Model Summary.........................................................................45
Table 4.9d – Coefficients................................................................................46
Table 4.10 – Causality test for DO and WO....................................................47

Table 4.11 – Causality test for DO and CPI...................................................48
Table 4.12 – Causality test for WO and CPI..................................................49
Table 4.13 – Causality test for CPI and WOEX.............................................50
Table 5.1 – Summary of hypotheses and results.............................................53


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List of ABBREVIATION

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-

WO

:

Global oil price

-

DO

:

Domestic oil price


-

CPI

:

Consumer price index

-

WOEX

:

Global oil price transferred in VND

-

EX

:

Exchange rate VND/USD


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Chapter 1: INTRODUCTION
1.1 - Introduction
This chapter portray general introduction for the current research with which research
problem, research objectives and research questions are provided as the rationale for
this research. An introduction to the methodology to be used and the scope of the
research is also addressed in this chapter. At the end of the chapter, structure of the
research is provided. The Outline of this chapter is shown in figure 1.1
Figure 1.1 – Outline of chapter 1
1.1

Introduction

1.2

Research background

1.3

Problem statement

1.4

Research Objective

1.5

Scope and Methodology


1.6

Structure of the Research

1.2 - Research Background
At the beginning of the year 2007, domestic oil price had increasing continuously
following the sharp hiking of the world oil price. Incessant fluctuations of global crude
oil price also lead to change of overall domestic prices. During the same time, in
dealing with the effects of finance crisis derived from American mortgage crisis in
2008, Vietnamese government’s monetary policy and its macro targets have been
adjusted from time to time.
Articles repeated in many newspapers and magazines conclude that increases in
oil prices such as those seen in recent years passed through the country’s inflation.
Whenever oil price increases, other prices also rise later. It raised living expense
higher than before, while salary and wages have been kept stable still. As a result, the


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residential life gets tougher, although Vietnamese oil price is somehow still subsidized
by the government. From 1995 up to now, domestic oil price is floating under
government’s acceptance.
1.3 - Rationale of the Research
It is easy to recognize that rising oil prices tend to affect the overall consumer price
index (CPI) directly and indirectly.
- Directly, through raising its energy cost component, which includes the prices of
energy-related items, such as motor fuels, gas, and electricity. Gasoline and fuel oil are
derived directly from crude oil, so their prices follow oil prices very closely. An

increase in the price of oil may also affect energy costs through the prices of other
items that are close substitutes, thus leading to an increase from the prices of oilrelated energy to natural gas price. The extent to which rising oil prices translate into
higher overall inflation through higher energy costs depends on their persistence. If oil
price continue to rise, it may lead to sustained increases in the overall price level, that
is, to an increase in the overall inflation rate.
- Indirectly, through effective the core portion of the CPI, because energy prices
represent a considerable portion of the production cost for many of the items in it, such
as transportation services. In addition, if workers have to pay higher energy prices
themselves, they may bargain for compensating wage increases, which also increases
the production costs of items in the core CPI. The extent to which rising oil prices
translate into higher core inflation through higher production costs depends, among
other things, on how much they break into the overall inflation expectations of those
who set prices and wages. In fact, if rising oil prices lead to higher inflation
expectations over the longer term, rising energy and wage costs are more likely to be
passed through in terms of rising consumer prices. In this case, rising oil prices may
lead to sustained increases in the core portion of the CPI, that is, to an increase in core
inflation.



However, the matter is how strong the relationship between changes in crude
oil prices and in inflation is. In theory, the causal relationship is clear. A sharp jump in
the price of crude oil causes an inflationary shock and the impact will be greatest when
a country is a large-scale importer of oil and has many industries that use oil as an
essential input in the production process.
From articles on newspaper or magazine such as VN express, Saigon time and Tuoi
Tre newspaper etc… it is generally concluded that oil price affects to inflation – CPI.
1.4 - Research Objective
This research, therefore, puts an effort onto checking the relationship between oil
prices and inflation to answer the following question

Q1. Do oil prices affect to inflation rate?
Q2. How do oil prices affect to inflation rate?
This research measures the relationship of oil price fluctuation and inflation rate,
specifically consumer price index (CPI).
As noted above, the objective of this research is to test the hypothesis that
- Oil prices affect to CPI or not
- Oil prices affect to CPI by measuring the relationship between global oil price, local
oil price and CPI in long term.
It provide specific picture about the issue to macroeconomist and policymaker in
dealing with managing inflation during the current finance crisis.
1.5 - Scope and Methodology of the Research
1.5.1 - Scope of Research
This research is only using official data that announced on public information
channels. With the inflation, a chief measure of price inflation is the inflation rate, the
annually percentage change in a general price index. The research is concentrated on
fluctuation of the inflation rate through the core inflation – consumer price index (CPI)
of every month in Vietnam. While the oil price base on the crude oil price of



international trade. The reason of this using is that Vietnam is an oil importer.
Although Vietnam is an exporter of crude oil, the fuel and gasoline in consuming
domestic trading is imported from Singapore and others. Therefore, oil price is
controlled by the crude oil price of international trade.
Beside main factors were measured that oil price affect to inflation, the research
consider effect of relating components of CPI or other factors on oil prices such as
interest rate policy and government’s monetary policy for controlling inflation.
1.5.2 - Research Method
Firstly, relevant papers were reviewed to study their model of research and find out the
model for my research. After that, I collect demanding data and select the modelling

for processing data. With quantitative analysis, I choose monthly data from 1995 to
2010, total n = 191 months. By using Multiple Linear Regression analysis (MLR) of
SPSS software version 15 and Eview software version 6.0, the result will indicate
specific relationship between oil price and CPI. Chapter 3 will discuss the
methodology for this study in more details.
1.6 - Structure of Research
The structure of this research is shown in figure 1.2
Figure 1.2 – Structure of the Research
Chapter 1

Introduction

Chapter 2

Literature Review

Chapter 3

Methodology and Overview Data

Chapter 4

Data analysis and Findings

Chapter 5

Conclusion and Implication