Inflation in Switzerland – really not that bad!

The cost of living in Switzerland is one of the highest in the world, but relatively high salaries somewhat ease the pain for workers. And, with recent inflation seriously denting pay packets around Europe and beyond, here we take a look at how Switzerland has fared recently, in comparison to their European neighbours.

In 2022, Swiss inflation ran at 3.5%. But while this is a 29-year high, it is well below the double-digit levels seen in other countries such as: the U.S. which reached 9.1%, the U.K. which went double digit at 11.1% and the average in the euro zone which was recorded at 10.6%. 

An actual 2.8% rise in the cost of goods in Switzerland, meant that Swiss pay packets actually decreased by 1.9% in real terms in 2022. Some wage increase indicators by sector in Switzerland last year:

• Wages grew by 4% in the chemical and pharmaceutical sectors in 2022.
• The rubber and plastic goods sectors saw pay shrink by 2.2% in the same period.
• The electrical equipment and watch industries recorded salaries at 0.6% less vs previous year.
• Workers in the food industry recorded a flat year with no nominal wage growth.
• The industrial sector raised salaries only by 0.7% in 2022.

Despite the Swiss National Bank (SNB) raising interest rates to 1.5%, inflation still persisted, and in February 2023, it rose to 3.4% vs same time previous year. And according to the UBS Bank, Swiss purchasing power has now fallen to its lowest level in over 80 years! But also according to the bank, is not all doom and gloom, and it is now predicting that average pay in Switzerland will increase by 2.2% in 2023 and the SNB is actually forecasting that inflation will fall to 2.6% this year and back to 2% in 2024.

So while people in Switzerland may be unhappy about the record inflation in 2022, and a loss in real earnings, when we look at other neighbouring EU countries, where anti government demonstrations against poverty are now taking place, Switzerland seems to be in a positively good space!

But what keeps inflation in Switzerland relatively low compared to its neighbours? Basically, a strong Swiss franc, a resilient energy supply and state advocated pricing controls are just some of the factors. The last point being key, as in many other countries including those in the EU, this does not happen. The highest annual rates of inflation for 2022 in the EU were recorded in Hungary at 25.8%, Latvia at 20.1% and the Czech Republic at 18.4%.

The latest average inflation numbers for the Euro area from March 2023 show that inflation has actually slowed down to 6.9%. But when compared to Switzerland, this is practically still double! The lowest annual rates were recorded in Luxembourg at 2.9%, Spain at 3.1% and the Netherlands at 4.5%. The highest annual rates were recorded in Hungary with a massive 25.6%, Latvia at 17.2% and the Czech Republic just behind at 16.5% inflation.

Switzerland is often called “the land that inflation left behind” – but in addition to a strong Swiss franc which allows Switzerland to import goods from other countries at low rates, a resilient energy supply and state pricing controls, what are the other factors that contribute to Switzerland’s low interest rate?

• First and foremost, is the fact that the majority of people in Switzerland live in rented accommodation. And rents are not price indexed, so they do not automatically increase with inflation. There is also a strong political lobby to keep this system in place.
• Secondly, Swiss electricity prices fluctuate less than elsewhere and include a relatively high percentage of renewable resources such as hydro electricity, solar power with projects in the Alps and newly planned, also on train tracks.

• Thirdly, and not to be underestimated, is the fact that Swiss society is still very disciplined compared to other countries. On one hand, the political system of direct democracy means that everyone in the country has a say on what legislation is implemented. State inducted pricing controls are also common in Switzerland and people actually pay attention to what they are advised by the government and generally-speaking abide by the rules.

Banks raise interest rates to slow down an economy, but what we are seeing in many European countries at the current time, is that although higher interest rates have been introduced, inflation is still persisting. Poorer countries have high home ownership (e.g. Bulgaria at over 85%), which means these are now paying significantly more for their housing (assuming they have a mortgage).

The lack of governmental pricing controls could also be behind the fact that inflation persists in many EU countries as businesses there, simply raise their prices up to combat inflation. A term now referred to as “Greedflation” by studied economists who first referred to the term referring to oil companies supposedly exploiting inflation to create excessive profits.