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ECONOMY

EXPLAINED: Why Switzerland’s inflation rate has stayed low compared to elsewhere

Like many countries, Switzerland has been impacted by inflation and higher prices for months. But unlike other nations, the inflation rate here is much lower then elsewhere. This is why.

EXPLAINED: Why Switzerland's inflation rate has stayed low compared to elsewhere
Near-parity of franc and euro is one of the reasons for low inflation rates in Switzerland. Image by moritz320 from Pixabay

Inflation — and its impact on prices — has been a hot-button topic pretty much everywhere in eurozone countries, and beyond.

While the rates of inflation have started to soar already during the Covid pandemic, Russia’s invasion of Ukraine on February 24th has accelerated the process, driving up prices of raw materials and, consequently, of consumer goods.

First: what exactly is inflation?

Simply put, it is an increase in the prices of consumer goods and services, causing some loss of purchasing power. In other words, while our wages mostly remained the same, the cost of living went up, and is expected to continue to increase for at least the foreseeable future.

As the global economies slowly and painstakingly recovered from the Covid pandemic, Switzerland rebounded better and faster than many other countries — as it usually does during the times of global downturns. However, with many supply chains still disrupted and struggling to meet consumer demand all over the world, prices began to rise.

The war in Ukraine has also slowed or shut down altogether the production and supply of some essential agricultural and energy products, leading to higher prices.

READ MORE: Oil, bikes and furniture: The products you’re going to pay a lot more for in Switzerland

What are the current inflation rates in Switzerland and across the European Union?

While the Swiss rate in July stayed at 3.4 percent, it stood at 8.9 percent on average across the eurozone.

More specifically, the rate at the end of July was 6.8 percent in France, 8.4 in Italy, 9.3 in Austria, while in Baltic states such as Lithuania it exceeded 20 percent.

In the United States, the inflation rate stands around 9.1 percent.

Overall, Switzerland remains “in an absolutely comfortable position”, said economist Matthias Geissbühler. The government’s chief economist Eric Scheidegger said Switzerland is “an island of bliss” compared to US.

READ MORE: EXPLAINED: Why Switzerland’s cost of living isn’t as high as you think

Why is the Swiss rate so much lower than elsewhere?

There are a number of explanations for this phenomenon:

Strong currency

In good times and bad, the Swiss franc remains strong, sometimes even reaching parity with the euro. This acts as a defence mechanism of sorts by keeping import prices low.

As Switzerland relies on imports much more than many other countries, including the United States and Germany, lower costs of imports have a ‘cooling effect’ on inflation. 

 “This makes imports cheaper across the board. The strong franc helps the Swiss have high purchasing power internationally. And imported goods are the main drivers of inflation,” according to Neue Zürcher Zeitung.

Less reliance on Russian energy sources

Energy prices are “fundamental in explaining the differences in inflation, especially between Switzerland and the eurozone”” according to an analysis by EFG private bank.

“This is almost totally due to differences in the price of electricity. In February and March, the price of electricity in Switzerland rose by only 2.4 percent, while in the eurozone it surged by 34.3”, the bank reported.

The reason for this, EFG found, are different technologies used to produce electricity.

Data from the International Energy Agency shows less than 1 percent of the electricity consumed in Switzerland comes from oil and natural gas, while 58 percent originates from renewable sources like hydroelectric and nuclear power.

“By comparison, in the European Union over one-fifth of the electricity is produced with natural gas and over one eighth with coal”, the banks’ analysts found.

 The gap was even wider for electricity prices: in February, the wholesale price of electricity in Switzerland was 3.1 percent higher than a year before, while in in the eurozone the increase was as much as 83.2 percent.

READ MORE : Ukraine invasion: How reliant is Switzerland on Russia for energy?
 

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ECONOMY

Switzerland ‘an island of bliss’ compared to US, chief economist says

Switzerland does not expect to dip into recession this year despite the threat of an energy supply squeeze and when it comes to inflation levels the country was "an island of bliss" compared to the United States, the government's chief economist has said.

Switzerland 'an island of bliss' compared to US, chief economist says

The Swiss economy is “doing well” despite the impact of the war in Ukraine on energy prices, Eric Scheidegger told the SonntagsZeitung newspaper.

He said it was down to companies to steel themselves for the possibility of power shortages in the winter months.

“We may have to revise our economic forecast downwards for next year. The revised forecast will be published on September 20th.

However, we do not expect a recession for this year,” Scheidegger said.

“We run the risk of an energy supply bottleneck in winter. If there are persistent production interruptions in the EU and we ourselves have a gas shortage, it becomes problematic.

“In our negative scenario, we expect zero growth for 2023 instead of growth of almost two percent.”

Despite the threat of power shortages and the effects of the war in Ukraine, Scheidegger does not see a serious economic crisis heading towards Switzerland.

“At present, the economy is still doing well. Current indicators show that the economy in this country also developed well in the second quarter — after the outbreak of the war in Ukraine,” he said.

“Economic support measures such as general perks or tax relief are currently therefore neither necessary nor helpful,” he added.

‘Foreseeable events’

Scheidegger said the Swiss economy was less susceptible to high energy prices than other European countries as gas accounted for only five percent of its total energy consumption.

He said the government would discuss possible measures to curb high energy prices in the coming weeks, which could involve reducing health insurance premiums for low-income households.

The State Secretariat for Economic Affairs official said the help for businesses during the Covid-19 pandemic could not become the norm during economic downturns.

“It’s been known since spring that there can be a power shortage in winter. Companies have time to prepare for this,” he said.

“Companies can, and must, take this operational risk into account… it is up to companies to prepare for foreseeable events.”

As for inflation, he said Switzerland was “an island of bliss” compared to the United States, and inflation was likely to fall before the end of the year.

“At 3.4 percent, inflation is much lower here than in other countries.  Core inflation — inflation excluding fresh food, energy and fuel — is at two percent,” he said.

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