Switzerland seems to have found the formula for overcoming one of the most pressing challenges for European economies in recent years, especially since the start of the invasion of Ukraine. Data from organisations such as the OECD show that the country has managed to keep inflation under control. And even at a time when the European Union is struggling with huge food price increases, the Alpine country has managed to keep its prices at reasonable levels. The key lies in a formula that cannot be understood without its currency, tariffs and energy.

It is also a price adjustment that stands out in Europe.

What does the data say? While food prices have soared in other countries, including those in its immediate vicinity, due to the consequences of the war in Ukraine, Switzerland has shown remarkable resilience in controlling and containing inflation. For example, the 2022 fiscal year ended with an increase in costs, but this increase was far from the levels in nearby countries.

Its average annual inflation did not reach 3%, which was well below the 9.2% in the European Union, which saw a three-fold increase compared to 2021 that year, amid the Ukrainian conflict. The cost of food and non-alcoholic beverages also showed notable changes: in Switzerland, it grew by 4%, significantly below the 11.9% recorded in the European Union.

Can you go into more detail? Of course. The OECD allows you to consult inflation measurements for each country. And the latest 2022 data available on its official website show that the annual growth rate of the CPI for food in Switzerland is considerably lower than in the rest of the countries. To be precise: 1.66% compared to the OECD average of 13.16%. In Italy, it reached 9.14%, in France 7.28%, in Austria 10.75% and in Germany 12.56%.

What about from 2022? 2022 is an interesting exercise because the CPI data reflects the impact of the Ukraine war, a conflict that directly impacted energy and food costs in Europe. In Spain that year, the CPI for food recorded an increase of 11.6%, which the government says is almost entirely explained by external factors and import costs. However, an examination of price behavior in Switzerland suggests that this could extend beyond 2022.

The Statista portal has published a forecast of how Switzerland’s inflation rate will develop over the next few years, that is, until 2029. And the forecast assumes that for the rest of the decade, the interannual figure will be even lower than the 2.8% recorded in 2022. The Alpine country reached a specific inflation of 3.5%, representing the highest value in 30 years.

The OECD’s own monthly tables also provide updated data. For example, in June, the CPI in Switzerland was 1.3%, while it was 5.6% in the OECD, 2.7% for the G7 or 3.4% for Spain. In the food sector, the rate was -0.3%, while the OECD overall rate was 4.7%. The energy sector data was higher.

What does this data come from? Over the past few months, various analysts have begun to theorize about what has allowed Switzerland to avoid hyperinflation while other countries struggle with their prices. Thomas Jordan, the president of the Swiss National Bank (SNB), who is not fond of international media coverage, recently offered some clues.

In his opinion, institutions like the one he leads need to take a clear approach, not so much in terms of their specific prescriptions but in terms of their general attitude. Jordan argued in the newspaper: “I think those responsible for the national bank should concentrate on their work. They should do their job and not be distracted by other activities.” Bieler Tagblatt“It is better to be called boring or stubborn than to have people say I have the wrong monetary policy.”

Having managed to keep inflation below its 2% target since mid-last year, the SNB took a significant step in March by lowering interest rates to 1.5%. At the time, expectations were for inflation to average 1.4% this year, 1.2% next year and 1.1% in 2026. It announced a new 25 basis point rate cut in June.

Various materials. Switzerland has its own characteristics, such as its high cost of living, which is among the highest in the world, and its strong currency, the Swiss Franc, which has gained value for fuel imports. It is also outside the Eurozone. But at the end of 2023, Swiss Info has produced an interesting analysis in which it tries to answer a fundamental question: “Why is Switzerland resilient to food price inflation?”

The authors of the report recalled that, for example, pasta prices in Switzerland increased by 11.2% in 2022, a few points below a neighboring country with an Italian tradition, as world wheat supplies were affected by the war in Ukraine. “Switzerland has generally resisted the global food price crisis quite well. This is particularly surprising, considering that the small country has to import about half of its calorie needs,” they note.

They pointed to a complex combination of factors to explain this: Swiss prices, cost allocation structure, price regulation, tariff system and employment in energy and certain key sectors.

Price problemThe first key is that Switzerland is a strange country in terms of cost. The World Population Review ranks it as one of the most expensive countries to live in, behind Monaco and the Cayman Islands.

Swiss Info points out that the higher prices, which also take into account wages and logistics, act as a “buffer against fluctuations in world prices.” “Although a significant part of the retail price covers logistics, warehousing and wages, the impact of price changes on these components is comparatively smaller than price changes in other countries,” explains Thomas Schwab of Bertelsman Stiftung.

A valuable cushioning effect“This is a result of Switzerland’s higher overall price level, which softens the relative change in prices of commodities such as bananas compared to countries with lower price levels,” Schwab adds. Another important point is that the distribution of fixed and variable costs in food production in the Alpine country is different from that in other countries.

Here, Swiss Info notes, the first fixed costs, which include machinery, land, labor or facilities, are “much higher” than variable costs such as fertiliser, pesticides or seeds. In 2017, the fixed costs per tonne of wheat amounted to 500 Swiss francs, while the variable costs were less than half that, at around 200 francs. In Germany, the distribution between fixed and variable costs was fair.

And adjusted prices. There is another key to prices: regulation. A significant portion of their assets are controlled by the Government. Global Europe, which notes that between a quarter and a third of the products used to calculate the inflation rate are regulated, is the highest rate in Europe as a whole.

To be more precise, Eurostat data show that the proportion of goods subject to price regulation in the harmonized index was well above the rest of Europe, at 27.5% in August 2023. This feature makes their prices less sensitive to market fluctuations.

Tariff system. There are more keys. Especially when it comes to agricultural imports. Among them is the tariff system, which is closely linked to the Alpine country’s production level, Swiss Info recalls. “In times of abundance, tariffs are set at high levels, which protects against price fluctuations on the world market. Conversely, when global prices rise, tariffs are adjusted downwards,” Schwab adds.

Import duties will largely depend on the agricultural product in question being produced in Switzerland. The tariff policy has another, no less interesting effect: Some products produced in the country are less exposed to the global market, boosting the economy in the process.

The role of energyA few months ago, BNP Paribas published an analysis asking the same question: How was it possible for Swiss inflation to remain at much lower percentages while the eurozone reached an annual maximum of 10.6% in autumn 2022? According to him, there are two answers: “The energy mix and the strength of the currency.”

The financial services firm particularly noted the limited weight of fossil fuels in the country’s final electricity consumption. “The increasing weight of hydroelectric, nuclear, photovoltaic and wind energy has allowed the Swiss economy to be moderately affected by the rise in gas prices from Russia and the rise in oil prices,” the analysis said.

“Energy also represents a smaller share of household consumption expenditure, meaning that the weight given to its contribution when calculating inflation is lower than in the euro area (10.2% versus 5.5% respectively).”

“More moderate price increases”The result, according to analysts at BNP Paribas, is that the contribution of energy to inflation is, on average, lower in Switzerland than in the euro area. The weight of Switzerland’s energy system, its lower dependence on oil and gas than its other European neighbors, or the weight of the public sector in the sector or structure of the energy market are also highlighted by other analysts when explaining the country’s behavior of inflation.

“In Switzerland, unique energy market structures contribute to a more moderate increase in energy prices, which translates into lower food inflation rates,” Schwab said.

Currency strength. This is another factor that stands out in the BNP Paribas analysis. “The appreciation of the Swiss franc has also contributed to controlling inflation by reducing the cost of imported goods and services,” the report stresses, before highlighting how this strategy has helped the country control the costs of imported oil and natural gas. In general, analysts emphasize that currency strength is one of the factors behind moderate price stability.

Its resilience is partly explained by its “safe haven” status and is backed by gold, bonds and asset reserves, reminds Karen Gilchrist on CNBC.

Images | Henrique Ferreira (Unsplash), OECD

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