Inflation is projected to remain at low level, said the Bank of Mongolia (BoM) in the Inflation Report as of last December.
The base forecast shows that due to slowing economic activity for the year, deflation will continue until the third quarter of 2017. Price level will increase due to exchange rate devaluation, but inflation is expected to remain low.
Food and non-food inflation will continue to decrease until the second half of 2017, where it is expected to rise due to the base period effect.
Consumer price index-based annual inflation reached -0.1% in September 2016, falling 1.6 percentage points from the previous quarter and 5.0 percentage points compared to the previous year. The decline in annual inflation comes after three quarters of continuous deflation.
Low, stable inflation in the first half of 2016 was followed by falling prices and deflation in Q3, due to the following:
- Meat prices declined 23.5% and had a negative impact on inflation.
- Although state administrated service prices are increased in Q3 of every year, there was no price change this year, eliminating its effect on inflation.
- Diminishing household incomes across the last five quarters has led to a decrease in demand-side inflation.
The contribution of food prices to headline inflation also decreased in September 2016, by 0.6 percentage points compared to the previous year. The sharp fall in meat prices this quarter, adhering to its seasonal pattern, was the main influencing factor. As of the end of September, the price per kilogram for mutton and beef fell by MNT 1500 – 1700 compared to the previous quarter’s end.
The contribution of non-food product and service prices decreased by 1.7 percentage points compared to the end of the previous quarter and 5 percentage points from the previous year, due to the lack of price change in state administrated services this year and shrinking domestic demand.
Food prices are not expected to rise much in the coming months. Cold winter forecasts and dzud warnings may increase meat supply and reserves. Price pressures of non-food product and service on inflation is not expected to rise much in the coming months. However, exchange rates may contribute directly and indirectly to increased inflation, BoM reported.