Switzerland: The land that inflation left behind

By Reuters   March 11, 2022 | 03:12 am PT
Switzerland: The land that inflation left behind
Shoppers walk along the street after the Swiss government relaxed some of its COVID-19 restrictions, as the spread of the coronavirus disease continues, at the Bahnhofstrasse shopping street in Zurich, Switzerland March 1, 2021. Photo by Reuters/Arnd Wiegmann
While the rest of Europe grapples with surging prices, in Switzerland inflation is so tame that some key costs are actually falling.

The price of healthcare - a big chunk of Swiss household budgets - dropped by 0.5% on the year in February, when overall inflation hit 2.2%. That was the highest inflation rate since 2008, but still only a fraction of the levels other industrialised countries face.

A combination of factors lies behind Switzerland's modest price pressures: consumers demanding better deals, an energy mix that leaves the country less exposed than others to soaring oil and gas costs, wage restraint, and some protection against import price inflation from the strong franc.

"People come here because they can buy at favourable prices," said entrepreneur Mandy Klein, a German who started her delivery address business from home in 2009 and now runs two depots in the picturesque lakeside German border town of Constance.

The brisk delivery trade in Constance shows Swiss households' drive to reduce their living costs wherever possible. Even so, Eurostat figures show the price level for household consumption expenditure was still 60% higher in Switzerland in 2020 than the euro area average.

The upshot is that consumer groups, fed up of Switzerland being a "high-price island", have lobbied for political action which resulted in two legislative changes from the beginning of this year to give households a better deal.

The first toughened up Switzerland's cartel law to impede businesses from marking up their prices for the Swiss market.

The second measure banned so-called geo-blocking, used by retailers to prevent online shoppers from buying cheaper products or services from sites abroad by, for example, diverting them to Swiss websites.

Prisca Birrer-Heimo, a lawmaker of the centre-left Social Democrats who co-led a 'fair price initiative' demanding reform, has seen an impact already.

"There is still potential, but we have noticed the enormous price differences are no longer as big as they were," she told Reuters.

Money spinner

Characteristics specific to Swiss markets, and the weight of certain key items in the consumer price index (CPI), also help explain why inflation is so low in Switzerland.

Healthcare, for example, which is provided by private firms, accounts for 17% of the CPI index, compared to 7% in the United States and 5% in Germany, OECD data show. The government has prodded health insurance companies to trim premia.

"This has been an area, which instead of creating inflation and price increases, has rather seen the contrary out of political pressure," said Hechler-Fayd'herbe at Credit Suisse.

Thanks to Switzerland's lakes, rivers and mountainous geology, hydropower accounts for around 57% of the country's energy production, the federal energy office says, leaving the Swiss far less exposed than others to spiralling oil and gas prices.

The resulting efficiencies mean energy makes up just 5% of the Swiss CPI basket, OECD data show, compared to 7% in the United States and 10% in Germany, where consumers are far more exposed to rising fossil fuel prices.

"Our best guess is that (average) inflation in 2022 in Switzerland is running at 1.8%, although the recent surge in oil prices raise the risk of a somewhat higher rate," said Hechler-Fayd'herbe at Credit Suisse. "For 2023, we think inflation will average 1.0%."

With wage salready higher than in nearly all other European countries, there is less pressure for raises. Telecoms operator Swisscom is increasing salaries by just 0.9% this year.

The strong franc also helps. Seen as a safe haven, the franc this month briefly rose above parity with the euro and hit a seven-year high.

The currency's purchasing power gives Switzerland some protection against higher import costs and feeds into the stable domestic price environment, giving exporters an opportunity to gain an edge over foreign rivals facing higher inflation.

Jean-Philippe Kohl, vice director and head of economic policy at electrical and mechanical engineering industry group Swissmem, said half of the sector's exports go to the euro zone, where inflation is running close to 6%.

"Sooner or later, a Swiss company that manufactures a product here and sells it in the euro zone will be able to sell it at a higher price ... so you profit from it," he said.

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