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Significance of price stability

 

Price stability is a concept concerning the general price level in the economy. Achieving price stability should be understood as not only avoiding inflation, but also avoiding deflation. Price stability affects GDP and employment growth through the following ways:

  • When the price level is stable, it becomes easier for the public to distinguish changes in relative prices and thus facilitates an environment to make more accurate consumption and investment decisions;
  • By sustaining a stable price level, inflation risk premium could be reduced. This leads to a decrease in interest rate and an increase in investment;
  • It helps to avoid inefficient activities to be implemented with the purpose of lessening the negative impacts of inflation /deflation/;
  • It could lower the negative effects of taxation and social welfare framework that might distort economic activities;
  • It could prevent inappropriate allocation of resources and revenue;
  • It contributes towards financial stability.

The targeted inflation rate is set and included in the Monetary Policy Guidelines every year. However the issues of what does the concept of “price stability” being understood as in the case of Mongolia and what the standards for its measurement are remain yet to be clear.

As an example, it is stated that consumer price inflation shall be kept within one-digit in the Monetary Policy Guidelines for 2012. If price level rises by less than 10 percent in 2012, would it be understood that the price stability is being attained? On the other hand when inflation exceeds 10 percent, should we consider that price stability is not being achieved? It is impossible to address these issues directly.