Why is Swiss inflation so bizarrely low?

Dutch inflation has risen to almost 10%. Inflation is also soaring in other European countries, with Switzerland as a notable exception. Lower health costs, a sustainable energy mix and an expensive franc keep inflation low in the Alpine country.

Everywhere in Europe policy makers are awake by the sky-high inflation. The Netherlands is not the only country where inflation figures are skyrocketing, although we are one of the frontrunners with almost 10% in March. In February, inflation in Britain soared above 6%, while US inflation is approaching 8%. As you've probably noticed at the gas station or in the store, the danger of higher prices is that your purchasing power decreases. The rising inflation is caused, among other things, by problems in supply chains that arose when the economy started up after the corona crisis and by the sharp rise in energy prices.

Alpine Exception
These are worldwide phenomena and you would expect that all countries are affected by this. Switzerland, however, is a notable exception. Swiss inflation stood at 2,2% in February. That is only a fraction of the level in neighboring countries. There are several explanations for the big difference. In the first place, life in the Alpine country was already quite expensive. Household expenses were about 60% above the eurozone level. Under pressure from the population, the government is taking measures to reduce this difference. For example, international online stores are no longer allowed to automatically redirect Swiss customers to the website of their home market, where prices are higher than in neighboring countries.

Strong franc curbs inflation
In addition, health insurers have been pressured to lower premiums. As a result, the Swiss will spend 0,5% less on healthcare at the beginning of this year. Another cause of the remarkably low inflation is the country's energy mix. Hydroelectric power stations provide no less than 57% of the available electricity. In addition, Switzerland relies heavily on nuclear energy. As a result, the country is much less affected by rising oil and natural gas prices than other countries on the continent. Finally, the Swiss franc also contributes to low inflation. The currency is very popular on foreign exchange markets due to the increasing economic uncertainty. A month ago, the franc was even worth slightly more than a euro for a while. But even after a recent dip, the currency is more than 8% higher than a year earlier.

hard on the brake
The expensive franc makes the import of goods and services from other countries relatively cheap. Contrary to what you might think, this is not at the expense of the competitive position of Swiss companies. Due to the low inflation, wages rise much less quickly than in neighboring countries, so that costs hardly increase. On the other hand, in sales markets across the border, it is possible to keep up with price increases resulting from high inflation. Despite the good position of Switzerland, a much further advance of the franc is not obvious. As soon as the currency exceeds the €1 limit, the central bank will hit the brakes hard.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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