MONGOLIA QAURTERLY ECONOMIC UPDATE ISSUED BY WORLD BANK

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INFLATION
Inflation is on an upward trajectory
The strong economic rebound in Q1 2010 (during which real GDP grew by 7.6 per cent year-on-year) and the prospects of continued strong growth in 2010 have contributed to a recent upturn in consumer prices. The seasonally-adjusted core and overall UB consumer price indices have showed monthly growth in the range of 2 to 3 per cent since the fourth quarter of 2009. This rise in inflation is a strong warning signal of the risk of overheating and a return to the boom-bust cycles of recent years.
Annual CPI inflation reached 11.7 per cent for UB and 11.6 per cent for the country in May compared with less than 2 per cent in December 2009. In part this acceleration has been due to supply side factors. In particular the rise in meat prices, up by 36 per cent year-to-year on average since the start of the year, reflects shortages of meat due to the impact of large livestock losses caused by the dzud at the start of the year. Energy tariffs have also been raised, and further increases are planned. The price of rice has risen due to a Chinese government ban on rice exports (to tackle domestic shortages).
However, recent trends in inflation also reflect demand side factors arising from the underlying recovery (May imports were up by 45 percent year-to-year), as well as policy stimulus in the form of the MNT 70,000 cash handout in February. Recent rises in food prices may also translate into increased inflation expectations, feeding into wages and pushing up core inflation (which was 4.3 per cent year-to-year in May). During the previous boom period, rising core inflation accounted for the bulk of headline inflation causing it to remain high even after energy and food price inflation eased, mainly due to persistence or inertia effects.
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