According to recent reports, Switzerland’s consumer price index (CPI) changed by -0.1% in September 2023 compared with August 2023, and year-on-year inflation stood at +1.7%. This rate is below the Swiss National Bank’s (SNB) target maximum rate of 2.0%, as reported by Switzerland’s Federal Statistical Office (FSO).
In comparison, the average Consumer Price Index CPI in the European Union increased to 127.78 points in August from 127.17 points in July of 2023. This represented an increase of 0.48% from last month and 5.94% from one year ago.
EU members and other European countries not using EURO currency are not included in the above statistic and these show the following changes in CPI:
|Country||CPI (Inflation) Value|
|United Kingdom||The Consumer Prices Index (CPI) rose by 6.7% in the 12 months to August 2023, down from 6.8% in July, and down from a recent peak of 11.1% in October 2022.|
|Czech Republic||Consumer Price Index CPI in Czech Republic increased to 149.10 points in August from 148.80 points in July of 2023. This means Inflation is currently 10.10%|
|Denmark||The annual inflation rate fell to 2.4% in August 2023 from 3.1% in the previous month, pointing to the lowest level since September 2021.|
|Hungary||Consumer Price Index CPI in Hungary increased to 1931.10 points in August from 1917.60 points in July of 2023. Inflation currently stands at 14.20%|
|Poland||The inflation Rate is at 9.50%, compared to 10.30% last month and 14.80% last year|
|Sweden||The annual inflation rate in Sweden remained constant at 9.3% in July 2023.|
With the exception of Denmark, inflation in Switzerland is well below the EU average and also those countries in the EU not using the Euro. So why is this? In this post, we take a look at what the main drivers of inflation currently are in the EU and offer reasons as to why the rate of inflation is consistently lower in Switzerland.
Cost of goods unequal
Generally speaking, high energy and commodity prices as well as supply bottlenecks have driven strong inflation across the euro zone, as well as higher inflation differentials between euro area countries.
In addition, the individual energy policies of each country has also affected inflation. For example, the type of contracts each country concludes with its fuel suppliers and the speed at which energy prices on exchanges pass through to retail prices all have an impact on inflation.
This is where individual government policies and measures including the ability of distributors to pass on costs to consumers, and lowering indirect taxes or price caps, have had a direct influence on prices for end customers. And one reason why inflation is so high in some EU countries.
Goods are more, or less important for the CPI in relation to the individual buying power of European countries:
- Expenditure on energy is different across most countries in Europe and represents only 5% of total household spending in Switzerland, but a full 16% in Latvia for example.
- Similar differences can be seen for food. The average Swiss household spends a total of 16% of its outgoings on food, while the average Latvian household spends 34%.
- A higher weight of rapidly rising items in the consumer basket naturally increases headline inflation in each specific country.
- The is also a different intensity of the growth in prices which may also be related to the initial price level.
- For example, in the Czech Republic, there is a clear statistical relationship between the 2020 price levels and current inflation rates which is being driven in part by restaurants, hotels, recreation and culture events, leading to the Czech Republic now having the highest inflation in Europe apart from Hungary.
- In terms of the intensity of inflation, the Czech Republic also holds several “first places”:
- in the area of hotels and restaurants at 23.7%
- in clothing and footwear 19.7%
- or in the recreation and culture category 12.2%.
None of the above categories is directly associated with external shocks. Growth in prices of food, transport and energy is only slightly above the European average in the Czech Republic, while for energy it is even below the average. The term “Greed-flation” is now used to describe businesses simply putting up their prices to cover for losses during Covid lockdown.
So how does Switzerland keep inflation so low?
The average inflation rate for consumer prices in Switzerland from 1960 to 2022 was 2.4% per year. In the same period, the population has grown to nearly 9 million, representing an increase of 64.6 percent. A huge growth for a small country, and a fact that could make keeping inflation under tabs even more difficult. So how has Switzerland been able to consistently keep inflation low over a sustained period of time?
- In Switzerland – (unlike in the EU), in addition to energy, the country also has stringent controls on the prices of goods and services. This also makes them less susceptible to inflation-led fluctuations as witnessed in some EU countries.
- The consensus or power-sharing democracy model which operates in Switzerland means the population of Switzerland is generally very self disciplined and socially responsible.
- Switzerland has a limited reliance to fossil fuels for electricity generation.
- In January 2015, Switzerland announced that it was going to scrap its currency peg of CHF 1.20 to the Euro. This means that the Swiss franc’s strength against the Euro can be self-managed to a certain extent and Switzerland is not directly tied to EU inflation rates.
- Mild wage growth demands over many decades – and although the right to strike does exist in Switzerland, work strikes practically never occur. This contributes to the financial and political stability of the country.
- Switzerland’s ability to feed itself stands at about 60%. This figure reflects the proportion of the population’s needs that Switzerland can meet itself.
In addition to the above and a highly-organised and unique direct democracy political model, the Swiss are by nature highly consensus driven. The ability of the population to be focused and disciplined to achieve national goals lies at the very heart of Swiss culture. And with this natural ability comes the expertise and resourcefulness to succeed in terms of diversity.
Perhaps the governments of other countries including the EU, could take examples from Switzerland to try and manage their inflation better? Simply hiking interest rates to higher levels to “cool” the economy without introducing price controls, can – and normally will, lead to price rises driven by non-controlled products and service price rises.
It was Winston Churchill who famously said about inflation: “The inflation of prices, the most cruel and unprofitable of all the taxes, falls hardest upon the poor.”
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