Just as counterparts suffer the worst cost-of-living crisis in a generation, Switzerland is standing out with probably the most benign inflation shock in the advanced world.
(Bloomberg) — Just as counterparts suffer the worst cost-of-living crisis in a generation, Switzerland is standing out with probably the most benign inflation shock in the advanced world.
Even if Swiss National Bank officials warn they may need to keep raising interest rates, the annual price growth they’re confronting — now slightly above 3% — remains the OECD’s lowest, a fraction of that in the neighboring euro region and the US, and less than in Japan too.
How a country with a population similar to New York City somehow navigated the worst of the global storm might prove instructive at a time when a synchronized inflation scare has yet to be fully tamed. Having its own currency helped, along with other policies keeping ties to neighbors at arms’ length and otherwise insulating it while maintaining an open economy.
With the newest consumer price index out Monday, showing 3.3% price growth, here’s a closer look at why Swiss inflation is dwarfed by peers.
1. Franc Strength
In an interview last month, SNB President Thomas Jordan cited the franc as “probably the most important” reason price growth is lower. Letting the currency strengthen absorbed “some of this inflationary pressure coming from abroad,” he said.
From its 2021 low point, the franc nominally appreciated some 13% against the euro, making imports cheaper and building a firewall to the outside world.
Maxime Botteron, an economist at Credit Suisse Group AG in Zurich, reckons that the cushioning effect gets exaggerated. A 10% appreciation in the franc against the euro only produces a 0.5-percentage point drop in headline inflation, according to his calculations.
“The strong franc limits imported inflation, but this effect is generally overestimated,” he said.
2. Inflation Basket
Jordan also cited the lower weight of energy in Switzerland’s inflation basket. While electricity and fuel account for 6.6% of the harmonized European consumer-price index, they only account for 3.4% of Swiss CPI, having an even lower weight in the newly calculated basket published Monday than before. Higher energy prices just don’t lift inflation as much.
Swiss goods and services are more expensive than elsewhere. So while energy isn’t actually cheaper, what consumers pay makes a smaller part of total spending.
Beyond the simple math, the Swiss economy can claim to be more energy efficient than European peers.
“A shock in energy prices doesn’t lead to consumer-price hikes as quickly, which limits second-round effects,” said Alessandro Bee, an economist at UBS Group AG.
3. Lower Starting Point
Switzerland has had limited experience of price growth recently, and was already one of the world’s most expensive places to be a consumer. The SNB also has a lower inflation target than counterparts, aiming to keep it between 0 and 2%.
At the deepest point in 2020, price growth was -1.3%. The country has had disinflation in almost half of all its monthly data over the past 10 years.
Against that backdrop, inflation had a longer way to go to reach higher global levels. Consumers’ anticipation of price growth is also muted, what UBS economist Bee calls an “inertia effect.”
“People have been used to low inflation for decades, so inflation expectations are somewhat sticky,” he said.
4. Food Costs
Botteron at Credit Suisse notes that food prices didn’t rise as much as elsewhere, with price hikes of 4% at the end of last year compared to some 16% in the euro zone.
He cites “Swiss protectionism” as the main reason. The country operates a separate agricultural regime from its neighbors in the European Union.
Additionally, given high domestic prices, many consumers drive across the border for cheaper shopping. Swiss retailers may have avoided passing on costs to stay competitive.
5. Regulated Prices
Switzerland has a larger share of government-controlled prices than in other economies. Notably, household electricity bills can only be changed once a year, which explains last month’s inflation rise of 0.5 percentage points.
“In general, this only means a delay in price increases,” says UBS’s Bee. “But consumer prices also didn’t rise as much, because by the time price hikes were allowed now in January, wholesale electricity prices had already eased a bit.”
6. Drug Comparisons
Similarly, the Swiss Federal Office of Public Health compares drug costs with other countries and can dictate price cuts. The regulator claims that through this, it saved the health care system expenses of 250 million francs ($270 million) between 2020 and 2022.
The policy has shaved about 0.1 percentage point off inflation, says Botteron at Credit Suisse.
7. No Quantitative Easing
Even with the world’s lowest rate at -0.75% until last June, the SNB’s avoidance of quantitative easing may have proved auspicious.
More money circulating in the economy from bond buying increases the risk of inflation, said Alexandra Janssen, an economist and chief executive of Zurich-based advisory firm Ecofin Portfolio Solutions.
She highlights how jurisdictions that undertook massive government-debt purchases saw a significant increase in M-3. That’s a broad measure of money including less liquid assets of financial institutions and corporations.
“Switzerland has produced less inflation because the SNB has, in this respect, pursued a better monetary policy,” Janssen said.
Her point may be controversial among economists whose arguments about QE in major economies are likely to rage for years.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.