The Swiss inflation rate is presently the lowest among all OECD nations, despite the warnings of Swiss central bank officials about potential future interest rate increases.
It is even lower than, for instance, Japan, where inflation has been virtually nonexistent for years. According to analysts, there are numerous explanations for this phenomenon.
01 The robustness of the Swiss franc
Probably the most significant factor is the strength of the local currency. Since its lowest point in 2021, the Swiss franc has appreciated against the euro by 13 percent in nominal terms. This has reduced the cost of imports and created a sufficient buffer against inflationary shocks from abroad.
Early in 2023, Thomas Jordan, president of the Swiss Central Bank, stated that the strength of the Swiss franc has helped alleviate some of the inflationary pressure from abroad.
However, there are economists who believe the impact of the Swiss franc’s strength to be less significant. This is the case with Maxime Botteron, an analyst at the Credit Suisse finance institution. He believes that the effects of a robust Swiss franc are overstated. According to his calculations, a ten percent appreciation of the franc against the euro results in only a half percentage point decline in headline inflation. Botteron told Bloomberg, “A strong franc does reduce imported inflation, but this effect is overstated in general.”
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02 An alternatively constructed shopping inventory
The second possible explanation relates to the reduced weight of energy in the Swiss consumption bundle used to calculate the inflation rate. While electricity and fuels account for approximately 6.6% of the harmonised European consumer price index, the Swiss figures are distinct. It is only 3,4 percent, which implies that the increased energy prices cannot have a significant impact on Swiss inflation due to the predetermined parameters.
Even if energy is not less expensive in Switzerland than elsewhere, it represents a negligible portion of the country’s total expenditures. According to statisticians, the Swiss spend significantly more on relatively more expensive products and services. This is why these products are more prevalent in their consumer’s shopping inventory.
03 Regulated pricing
In contrast to other economies, Switzerland has a much higher proportion of government-controlled prices. In Switzerland, for instance, household electricity rates can only be changed once per year. This may explain only the half-percent monthly inflation between December 2022 and January 2023 in Switzerland, when such fluctuations occurred.
In general, this indicates that price increases are, in the ultimate analysis, lagging. In spite of this, consumer prices did not increase significantly because the energy price increase did not occur until January 2023, when wholesale electricity prices had already decreased somewhat compared to the preceding months. Bloomberg was informed of this by Allesandro Bee, an economist at UBS.
04 Food expenditures
According to the president of the Swiss central bank, the already high expense of food is another plausible explanation. During this economic crisis, food prices have not risen as dramatically as in other economies. In 2022, food prices in the eurozone rose by approximately 16 percent, while in Switzerland they rose by approximately 4 percent during the same period.
For the time being, Swiss retailers may have avoided passing on costs to consumers in order to maintain international competitiveness. In fact, the Swiss are frequently willing to travel across the frontier, for instance to France or Austria, in quest of cheaper goods, a trend that could be exacerbated by further increases in retail prices.
05 A distinct method for addressing inflation
The Swiss central bank approaches inflation somewhat differently than other central banks. In fact, it attempts to maintain long-term price level development between 0 and 2 percent. In 2020, the country’s price level is projected to decrease by 1,3 percent. Thus, inflation expectations for the Swiss economy as a whole are relatively subdued, which reflects the current state of affairs.
In January 2023, the year-over-year rate of inflation reached 17.5%. It has reached its pinnacle. At present, inflation decreased from 2.2% to 1.7% in May 2023 according to the Federal Statistical Office (FSO).
According to Swiss analysts, Swiss citizens have grown acclimated to minimal inflation over the course of several decades. Allesandro Bee told Bloomberg that Switzerland has traditionally been one of the most expensive countries in the world for consumers.
06 A novel approach to medical care
Moreover, Switzerland has greater command over the costs associated with pharmacy assortments. The Swiss Federal Office compared the prices of pharmaceuticals with those of other nations and analyses how their prices vary in practise. Therefore, it is relatively simple to reduce the expenses of certain pharmaceuticals in Switzerland.
07 Absence of quantitative easing
Another potentially important aspect is the Swiss central bank’s approach to conducting monetary policy. While central bankers there have also kept interest rates negative in practise, they have avoided quantitative easing.
According to economist Alexandra Janssen of the consultancy Ecofin, more money in circulation due to bond purchases increases the risk of a higher inflation rate. “The Swiss central bank has pursued a better monetary policy in this respect,” she said.
Other economists, however, dispute these theses and refute the idea that quantitative easing has somehow had a more fundamentally negative effect on inflation rates than long-term low interest rates.
