The nation has struggled to deal with several economic stresses, fueling concerns about the government's ability to manage fiscal policy as the trade deficit balloons and the Vietnamese dong remains persistently weak, bucking a trend across the region.

The consumer-price index rose 12.17% in January from the same month a year earlier, outpacing the 11.75% increase in December, and the fastest pace since February 2009, the General Statistics Office said in a statement Monday.

Compared with a month earlier, the index rose 1.74%. Vietnam's inflation figures are based on data for the first 24 days of each month.

The rise in the CPI in January mainly stemmed from higher prices for education services, food, housing and building materials, the General Statistics Office said in the statement. Demand for consumer goods and materials traditionally rise toward the year-end and ahead of the Lunar New Year, which falls in early February this year.

"With this inflation pace, it will be impossible for the country to keep its inflation for this year at 7%. This high inflation growth will also make it hard for banks to lower their lending rates, and hence companies will still face difficulties to expand production," said Le Tham Duong, an economist with the Ho Chi Minh City Banking University.

The government is aiming to keep inflation at 7% this year, compared with 11.75% last year. But that target seems increasingly challenging, as the government appears unwilling to switch off its pro-growth policy and instead pursue more moderate expansion in order to bring about economic stability.

The government has forecast economic growth of 7% to 7.5% this year, after it clocked gross domestic product expansion of 6.78% in 2010. During the five-yearly Communist Party congress earlier this month, members agreed to target annual economic growth of 7% to 7.5% between 2011 and 2015.

The trade deficit last year hit $13.24 billion, and combined with higher consumer prices has damaged confidence in the local currency and prompted the government to devalue the dong three times since November 2009.

ANZ Bank said in a note that there is a risk inflation could hit the high teens later this year if authorities fail to lift interest rates. "Most critically, escalating inflation would lead to a loss of confidence in the local currency and a shift from dong-denominated assets to U.S. dollars and gold. This would put more pressure on the currency given that Vietnam's meagre reserves cannot finance a widespread shift out of the dong," ANZ said.

ANZ said a sharp upfront increase in lending rates to around 20% would stabilize the economy sooner, while also delivering a shorter slowdown in economic growth.

The central bank lifted its benchmark rate on dong-denominated loans by 1% in November to 9%, but has vowed to cap interest rates on such loans at 14% in 2011.

By Vu Trong Khanh - The Wall Street Journal - January 24, 2011