{"id":31262,"title":"The Strong Swiss Franc and 5 other Reasons for Switzerland\u2019s Low Inflation","link":"https:\/\/bst-europe.eu\/de\/miscellaneous\/the-strong-swiss-franc-and-5-other-reasons-for-switzerlands-low-inflation\/","date":"6. Oktober 2022","date_unix":1665065449,"date_modified_unix":1754481560,"date_iso":"2022-10-06T14:10:49+00:00","content":"

Since winter 2020\/2021, inflation rates have rapidly risen in the world\u2019s developed economies. Switzerland, however, is an exception. Its inflation rate is markedly below the rates in Germany, the EU, the United States, and other countries. In September, <\/em>Swiss consumer price inflation unexpectedly slowed to 3.3%<\/em><\/a>. The strong Swiss franc is the main reason for dampening inflation \u2013 but there are other reasons why inflation in the country remains low.<\/em><\/p>\n

Switzerland\u2019s traditionally high level of price stability<\/strong><\/h2>\n

A look at annual inflation rates<\/strong> shows that Switzerland has experienced price increases in the last two decades that, in some cases, have been significantly below those of other countries such as France, Germany and the US. This was true, particularly in the initial years after the global financial and economic crisis of 2008\/09.<\/p>\n

\"\"<\/a><\/p>\n

The same phenomenon becomes evident if we look at monthly inflation rates<\/strong> since the beginning of 2018. In July 2022, monthly inflation in Switzerland was 3.4 percent. In Germany, it was 7.5 percent, and in the US, 8.5 percent.<\/p>\n

\"\"<\/a><\/p>\n

The main reason for low inflation: the strong Swiss franc<\/strong><\/h3>\n

The Swiss franc is largely responsible for Switzerland\u2019s above-average price stability. The country\u2019s currency has increased in value in recent years: While one Swiss franc was worth around \u20ac0.6 in 2008, by summer 2022, it cost \u20ac1.0.<\/p>\n

One reason is that the Swiss currency is considered a \u201csafe haven\u201d<\/strong> for financial investments. People who want to invest their money in Switzerland need Swiss francs to do so. This drives demand for the Swiss franc, which results in an increase in its value.<\/p>\n

\"\"<\/a><\/p>\n

Conversely, an appreciation in the value of the Swiss franc means a depreciation in the value of the euro against the Swiss franc. Consequently, goods imported into Switzerland from abroad become cheaper. This dampens inflation.<\/p>\n

The disadvantage of a strong currency is that products manufactured by domestic businesses become more expensive on foreign markets. That reduces the export opportunities for Swiss companies.<\/p>\n

The economic pressure on Swiss companies was so great that the Swiss National Bank (SNB) announced in early September 2011 that \u201cit will no longer tolerate a EUR\/CHF exchange rate below the minimum rate of CHF 1.20<\/a>. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.\u201d On January 15, 2015, it discontinued this minimum exchange rate<\/strong><\/a>.<\/p>\n

In addition to the strong Swiss franc, here are five other reasons for a dampening effect on prices in Switzerland:<\/p>\n

#1 Low demand for fossil fuels, and regulated electricity prices<\/strong><\/h3>\n

Switzerland\u2019s electricity needs<\/strong> are almost entirely met by hydropower and nuclear power. In 2021, 61.5 percent of the country\u2019s electricity<\/a> was generated by hydropower and almost 29 percent by nuclear power<\/p>\n

The main reason currently driving inflation in other economies \u2013 rising prices for oil, gas and coal \u2013 is thus not having as much of an impact in Switzerland as it has, for example, in Germany.<\/p>\n

In addition, Switzerland has a highly regulated monopoly market for electricity<\/a>. Private households cannot freely choose their electricity provider, and providers must set their prices according to the costs of efficient electricity generation. It is possible to set prices in this manner since most electricity providers are integrated local grid operators who produce the electricity they deliver themselves or buy it inexpensively based on long-term purchasing agreements<\/a>. Among other reasons, this means that the currently high marginal costs for gas power plants are not passed through to consumers\u2019 electricity prices.<\/p>\n

#2 Highest share of regulated prices in Europe<\/strong><\/h3>\n

Not only is the price of electricity highly regulated in Switzerland, so are the prices of other goods and services. Of those products used to calculate the rate of inflation, almost one in three is subject to price regulation. In no other country in Europe is the share so high.<\/a><\/p>\n

\"\"<\/a><\/p>\n

Merchants can often adjust prices only at certain times, which means regulated prices are less susceptible to short-term market fluctuations. Moreover, regulators are frequently guided in their pricing decisions by criteria unrelated to market developments, and consumers are therefore not fully exposed to what happens on global markets.<\/p>\n

#3 High import duties on agricultural products<\/strong><\/h3>\n

The second reason driving global inflation \u2013 rising prices for agricultural products \u2013 also plays only a limited role in Switzerland. The mechanism behind this is the high import duties that the country imposes on agricultural goods. The average tariff on imported agricultural goods<\/a> in Switzerland is just under 43 percent. In the EU, it is only 12.6 percent.<\/p>\n

The level of import duties depends on whether or not the agricultural product in question is produced in Switzerland. If Swiss producers exist, the duty imposed is high. For goods not produced in Switzerland (e.g., cotton and fish products), tariffs are very low<\/a>.<\/p>\n

The high degree of protection for Swiss agricultural products means that food prices in the country are largely decoupled from global market prices. Rising prices on global markets thus have less of an impact on the price level within the country.<\/p>\n

#4 High labor productivity<\/strong><\/h3>\n

The strong Swiss franc has a negative impact on the international competitiveness of the country\u2019s companies. Nevertheless, their products are in demand all around the globe.<\/p>\n

One reason for this is the Swiss economy\u2019s high level of productivity. As the OECD reported in January 2022 in its economic survey of Switzerland: \u201cSwiss labour productivity is among the highest of OECD countries.\u201d<\/a><\/p>\n

Rising productivity means that lower amounts of inputs are required to produce a given quantity of goods. This helps reduce inflation.<\/p>\n

\"\"<\/a><\/p>\n

#5 Methodological differences in the calculation of inflation<\/strong><\/h3>\n

To calculate inflation, a basket of goods and services is assembled that is as representative as possible for that country, and the prices of the basket\u2019s contents are tracked over time. Inflation is defined as the increase in these prices.<\/p>\n

The composition of the basket is different in Switzerland than it is in EU member states. One significant difference can be found in transportation costs, which are strongly affected by rising energy prices but given a lower weight in Switzerland\u2019s basket of goods.<\/p>\n

\"\"<\/a><\/p>\n

For international comparisons of inflation in Switzerland, Eurostat\u2019s HICP system<\/a> is used. This, however, results in a discrepancy in the Swiss inflation<\/a> rate compared to Switzerland\u2019s LIK methodology for consumer prices<\/a> \u2013 currently downward.<\/p>\n

Learnings from Switzerland<\/strong><\/h2>\n

Switzerland evinces a number of unique characteristics that have helped dampen inflation in the current situation. The strong Swiss franc is the main reason, although it is also clear that the euro\u2019s weakness is another reason for the strengthening of the franc.<\/p>\n

Moreover, market interventions such as the regulation of prices are much more likely to occur in Switzerland than in the EU. Such interventions help curb inflation in crisis situations such as the current one. Nevertheless, inflation is very high, even by Swiss standards. Further price increases in Switzerland are expected since the country cannot insulate itself completely from inflationary trends in Europe and around the globe.<\/p>\n

Yet Switzerland\u2019s special situation also ensures that the price level is typically high there, significantly higher than in the EU. Its high import duties, for example, result in high food prices. Swiss consumers will not benefit if these prices fall in the rest of the world sometime in the future.<\/p>\n

Because of this and the other reasons mentioned above, the cost of living in Switzerland is markedly higher than in the rest of Europe. In summer 2021 \u2013 well before the outbreak of war in Ukraine \u2013 the cost of living was 51 percent higher than in Germany<\/a>.<\/p>\n

Thus, the high cost of living in Switzerland can basically be seen as the price for being insulated when inflation occurs elsewhere in the world.<\/p>\n

About the authors<\/strong><\/p>\n

Thie\u00df Petersen\u00a0is Senior Advisor at the Bertelsmann Stiftung, specializing in macro-economic studies and economics. His focus lies on the causes and effects of financial and economic crises as well as the chances and risks of globalization. Most recently, he worked on the effects of carbon pricing and the benefits of a potential global climate club.<\/p>\n

Thomas Schwab\u00a0is Project Manager for the Europe\u2019s Future Program at the Bertelsmann Stiftung. He applies a data-driven approach to economic analysis by employing data science and econometric methods.<\/p>\n

Read more on European economies<\/strong><\/p>\n

Scarcity is Here to Stay \u2013 Challenges and Options for Action for Europe<\/a><\/p>\n

A Weak Euro \u2013 What Does it Mean for Europe\u2019s Economy?<\/a><\/p>\n

Is Europe Threatened by Stagflation?<\/a><\/p>\n","excerpt":"

Since winter 2020\/2021, inflation rates have rapidly risen in the world\u2019s developed economies. Switzerland, however, is an exception. Its inflation […]<\/p>\n","thumbnail":"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2022\/10\/AdobeStock_86191379_KONZERN_ST-EZ_High_Res_99400.jpg","thumbnailsquare":"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2022\/10\/AdobeStock_86191379_KONZERN_ST-EZ_High_Res_99400.jpg","authors":[{"id":312,"name":"Thie\u00df Petersen","link":"https:\/\/bst-europe.eu\/blogger\/dr-thiess-petersen\/"},{"id":29085,"name":"Thomas Schwab","link":"https:\/\/bst-europe.eu\/blogger\/thomas-schwab\/"}],"categories":[{"id":168,"name":"Miscellaneous","link":"https:\/\/bst-europe.eu\/category\/miscellaneous\/"}],"tags":[{"id":340,"name":"Inflation","link":"https:\/\/bst-europe.eu\/tag\/inflation\/"},{"id":408,"name":"stagflation","link":"https:\/\/bst-europe.eu\/tag\/stagflation\/"},{"id":466,"name":"switzerland","link":"https:\/\/bst-europe.eu\/tag\/switzerland\/"}]}