Five Questions About the Swiss Price Watchdog’s Inflation Warnings

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Switzerland has managed to tame high inflation in the last few months so why is the country’s price watchdog sounding the alarm on high prices?

Stefan Meierhans, the country’s official price supervisor, is well aware that households in Switzerland are feeling the weight of higher prices for everyday goods and services. Last year, Meierhans received 2,400 complaints from consumers about prices, almost twice as many as in 2021, and this year doesn’t look any better.

This week Meierhans sought to address some of these concerns by gathering consumer protection groups together for the first Purchasing Power Summit in the country. “There are letters that pointedly say – ‘Food, health insurance, electricity – where does it stop?’” said the price supervisor in an interviewExternal link with Tages-Anzeiger following the summit.

But how bad is inflation in Switzerland, one of the most expensive countries in the world? We tackle five questions about inflation and its repercussions.

Where are Swiss consumers really feeling the pinch?

Prices of everyday goods have been rising in Switzerland, especially when it comes to electricity, food, rent, and healthcare. Fabio Canetg, a specialist in monetary policy and host of the SWI podcast Geldcast, calculated that a typical shopping trip in Switzerland now costs 6.1% more than it did in the beginning of 2021.

The outlook for 2024 doesn’t look much better. In September, the government will announce changes to health insurance premiums, which experts predict could rise by 8-9% next year, making it the biggest annual rise since 2010. The Federal Electricity Commission also announced on Tuesday that electricity bills will rise by an average 18% (around CHF222) in 2024.

Rental prices are also a concern. Swiss law ties rents for existing tenancies to inflation and interest rates. A benchmark increase by a quarter percentage-point allows landlords to raise rents by 3%. After years of decline, the reference interest rate for rents ticked from 1.25% to 1.5% in June. The director of the Swiss Federal Office for Housing said in September that he expects rents to rise by more than 15% between now and 2026.

Higher negotiated prices for services provided by state-run companies such as the Swiss Post and Swiss Federal Railways will also come into effect in January 2024.

“All of these increases will put a massive and permanent strain on people’s wallets in Switzerland,” consumer price watchdog Meierhans told the Tages-Anzeiger in an interviewExternal link on Tuesday.

How bad is it, really?

Switzerland has weathered the global economic turmoil over the last couple of years relatively well. Inflation reached its highest level in 30 years in August 2022 at 3.5% but this was still far below rates of 9-10% seen in the US or eurozone.

Inflation was still on the higher end early this year but has since dropped to 1.6% in August, which is within the 0-2% range the Swiss National Bank targets for price stability. “Compared to other countries, we are in a comfortable position,” said Alexander Rathke, the head of Swiss Macro Forecasts at the KOF Swiss Economic Institute, told SWI. In some parts of Europe prices of basic foodstuff has risen by 30% – far more than in Switzerland over the same period.

Canetg warns though that “prices may not be going up as rapidly as before or compared to other countries, but they are still high and rising, which is hard on consumers”. The rising cost of electricityExternal link means a four-person household in Switzerland will be around CHF500 more a year than two years ago. Moreover, inflation figures don’t include health insurance premiums, which is a major household expense.

The big concern is that wages haven’t kept pace with inflation. A survey by Swiss bank UBS in November said Swiss purchasing power has fallen to its lowest level in 80 years.  According to the Federal Statistical Office (FSO), an average worker received a 0.9% pay increase in 2022 but saw all of this, and more, wiped out by a 2.8% rise in the cost of goods. This year nominal wages have increased by 2%, which is good for Swiss standards but lower than inflation said Rathke.

How much is inflation a drag on the economy?

If inflation is high for a long time, it can be a drag on economic growth because rising prices come with a lot of uncertainty. Raising interest rates helps curb inflation but it makes borrowing expensive, which can also be a problem.

“At the moment, it is mainly the high interest rates that slow down the economy, not the inflation in itself,” said Canetg. However, the country is affected by what is happening around the world. Central banks are trying to slow down economies, which suppresses demand for goods. This affects Switzerland, which saw the economy stall in the second quarter.

“The domestic economy is doing well,” said Rathke. “But lower demand for goods from abroad does impact Switzerland, especially in manufacturing.”

How does Switzerland plan to keep prices in check?

The summit came out with a few proposals to rein in prices. One key area concerns prices that are directly or indirectly influenced by the state such as the post, water supply, community day-care centers or transport. In this area, a joint declaration from the summit called for “companies to exercise restraint in price matters” and for politicians to move quicker on price reforms.

Meierhans also said he plans to take a deeper look at whether companies are taking advantage of price increases to fill their own pockets. As part of this, he will check if companies are raising their prices more than the additional 0.4% increase value added tax as of January 2024. Food companies such as Nestlé and retailers have faced allegations of so-called “greed inflation” amid rising prices.

“Whether anything should be done about profit margins though is a political question and one of fairness,” said Canetg. “The public may bear the burden of high prices now but in a crisis, it may be the companies that suffer losses.”

The summit also encouraged more efforts in the financial sector around interest rates and lower banking fees. In June, the Swiss National Bank raised interest rates for the fifth time in a row in a bid to counter “inflationary pressure”. It also didn’t rule out further hikes and said that it could intervene in currency markets to maintain price stability. 

Will these measures be enough? 

Some experts argue that current measures address symptoms but not the underlying structural issues. This includes the war in Ukraine that is affecting agricultural trade, the cost of the energy transition, and demographic changes that are leading to higher healthcare costs.

There’s less uncertainty than there was a year ago, said Rathke. “Switzerland is in a better position but we could have a very cold winter.”

Source : SWI