Inflation- the term we have been hearing for a long time now. Every other day we see newspaper articles and videos lined up reporting on how inflation is touching record high numbers. Inflation around the world right now is running very high with some countries once famed for their monetary stability seeing double digit annual price increases. Every other day we see the Reserve Bank of India or the Federal Reserve increasing the interest rates in order to curb inflation. But whatever measure the central governments are taking right now, it is just having a minuscule effect on the economy.
However Switzerland, a small mountainous nation in western Europe, has avoided rampant inflation even as other countries continue to battle sky-high prices. Even though the inflation in Switzerland hit a 29-year high of 3.5% in 2022 it is well below the double-digit rates of other advanced economies. The numbers are not so dramatic as seen in other countries such as the United Kingdom, United States and India. So, what is it about the Swiss economy that has largely avoided rampant inflation, and what can other countries learn from it?
Source:- https://www.roughguides.com/articles/best-things-to-do-in-switzerland/
So firstly, let's see what inflation is? Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year. Inflation is goods and services becoming more expensive, not money becoming less valuable. The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households. So, how does Switzerland battle the skyrocketing inflation?
For starters, prices in the country are already beginning from a high base. Switzerland is one of the world’s wealthiest countries, with a GDP per capita outstripping that of other major economies like the U.S, Japan and Germany. It is also home to some of the richest citizens in the world, with an average wealth of nearly $700,000 per adult — and a high cost of living to match. Because Swiss people are on average quite rich, the share of food in the overall budget is not as big as maybe in other countries. And hence Swiss people are less impacted by price hikes. They spend a lower proportion of money on essentials and more on luxury items like vacations and hobbies. These activities can be put off and be scaled up when prices are low in the near future.
Another reason is the strong price stability of the Swiss Francs (CHF). The country’s currency has steadily strengthened and while many currencies plunged against an appreciating U.S. dollar, the Swiss franc held steady amid volatility in Europe.
One of the reasons could be because of the “safe haven” status that Switzerland has acquired. The Swiss franc is heavily backed by large reserves of gold, bonds and financial assets, which help the Swiss National Bank ensure the currency’s stability during times of volatility. Along with that the Swiss National Bank has maintained a tight monetary policy. The country’s central bank has kept interest rates low for several years to support the economy. However, as inflation has started to rise, the bank has begun to take steps to tighten monetary policy. It has reduced its purchases of government bonds, which helps to keep interest rates low. Additionally, the bank has signaled that it may raise interest rates in the future if inflation continues to rise.
Switzerland imports around $302 billion worth of goods and services each year, the majority of which come from neighboring EU countries. A stronger Swiss franc provides an effective discount on those imports. Meanwhile it exports a near equal $305 billion annually — largely comprising higher value goods and services, such as watches, chocolates and pharmaceuticals, which are less susceptible to price fluctuations that are low-margin, mass-produced commodities.
Source:- https://www.ft.com/content/d29b1988-9f19-11e5-8613-08e211ea5317
Switzerland is also the home to panoramic views and lakes. It is self-reliant on oil and gas imports with hydroelectricity playing an important role in its energy supply, unlike many of its neighbors heavily dependent on oil and energy supplies. Hydroelectricity accounts for more than a tenth of Switzerland’s energy consumption which it derives from its more than 1500 lakes. Swiss energy suppliers are also largely publicly owned, meaning that they are less exposed to extreme market volatility through financial safety nets, while being subject to stricter pricing regulation. So the Swiss government was able to manage within the home resources while the rest of the countries were facing a heavy dependency to meet their energy and fuel needs. The rise in the price of oil and gas is because of the ongoing war between Russia and Ukraine.
Additionally, the Swiss government also has control over the price of goods and services which make them less open to inflation based price fluctuations.
The chart here clearly shows the percentage of goods and services that are administered by each country. Switzerland tops the chart with around 30% of the price of goods and services being tightly regulated in order to avoid wider market driven fluctuations.
Furthermore Switzerland is taking steps to increase the supply of good and services. The government is working to address supply chain disruptions by investing in transportation and logistics infrastructure. It is also working to address labor shortages by investing in education and training programs to help workers acquire the skills needed to fill in-demand jobs.
That all being said, it doesn't mean that all is well in Switzerland and the Swiss people are not feeling the weight of inflation. Locals have pointed out a relative rise in the price of rental accommodation and also some food products.
However, the Swiss National Bank said in December that it sees inflation falling to an average of 2.4% in 2023, before reaching 1.8% in 2024. That would come in under the bank’s 2% target. Still, economists said that is unlikely to hurt the economy. Switzerland’s unique economic landscape makes it a lot easier to curb inflation compared to the other nations.
As countries around the world grapple with inflationary pressures, Switzerland serves as an example of how sound monetary policy and self dependency can help to curb rising prices. While every country's situation is unique, Switzerland's success in maintaining price stability offers valuable lessons for policymakers and economists alike.
Written by:- J Shree Nidhi
Edited by:- Sunanda Singh
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