Rising costs and higher interest rates. It’s hard to talk about the economy these days without thinking of one word: Inflation. However, when it comes to Switzerland, the small mountainous nation in western Europe, the rise in prices has been far less dramatic than in many other countries across the globe. Inflation in Switzerland hit a 29-year high of 3.5% in 2022. While still high by Swiss standards, it is well below the double-digit inflation rates in other advanced economies like the U.S., U.K. and euro zone. So, what is it about the Swiss economy that means it has largely avoided rampant inflation, and what can other countries learn from it?
Switzerland’s High Base Prices and Wealthy Population Help Control Inflation
Switzerland’s inflationary story has multiple parts to it. 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 steep cost-of-living to match. In 2022, the Swiss cities of Zurich and Geneva held steady among the world’s 10 most expensive cities, even as inflation pushed up living costs in other pricey places like Singapore, New York, and Tel Aviv.
Tobias Straumann, a professor of modern and economic history at the University of Zurich, believes that people in Switzerland are less impacted by price hikes because they tend to spend a lower proportion of their income on essentials versus discretionary items such as vacations and hobbies, which they can scale back when prices go up. Additionally, Swiss citizens enjoy a very well-functioning social policy, which also contributes to their relative price stability.
Swiss Franc’s Strength and Reserve Backing Promote Price Stability and Trade Discounts
Another reason for Switzerland’s relative price stability stems from the strong Swiss franc. The country’s currency has also steadily strengthened, rising in value against the euro to reach parity in 2022. While the U.S. dollar strengthened against many major currencies in 2022, the Swiss franc held steady amid volatility in Europe. That’s largely due to its status as a “safe haven” currency or defensive asset. The Swiss franc is heavily backed by a large reserve of gold, bonds, and financial assets, which help the Swiss National Bank ensure the currency’s stability during times of volatility. The strength of its currency is also beneficial for its economy, which is heavily dependent on international trade. In 2020, Switzerland imported around $300 billion worth of goods and services, the majority of which come from neighboring EU countries. A stronger Swiss franc therefore provides an effective discount on those imports.
Switzerland is also less exposed to some volatile external factors that pushed prices higher in 2022, such as soaring oil and gas prices caused by Russia’s war in Ukraine. Home to around 1,500 lakes and numerous rivers, hydropower plays a key role in Switzerland’s energy production. Hydroelectricity accounts for more than a tenth of Switzerland’s energy consumption, making the country less reliant on oil and gas imports than some of its European neighbors. Swiss energy suppliers are also largely publicly owned, which means they are less exposed to extreme market volatility through financial safety nets but are also subject to more strict pricing regulation.
In December of 2022, Swiss food prices rose at an annualized rate of 4.0%. That compares with 11.9% in the U.S., 16.9% in the U.K., and 19.8% in Germany. Of the core products used to measure inflation in the euro zone, including food, housing, and transport, almost one-third are subject to price regulation in Switzerland — more than any other European country. High tariffs on certain agricultural imports also mean that domestically produced foods, such as milk and cheese, are preferentially priced and less impacted by movements in global food markets. This also helps to support the local economy and farmers, as well as promoting sustainable and environmentally-friendly practices.
Switzerland’s Stringent Price Controls: Energy and Rent Prices Remain Stable Amid Inflation
Switzerland also has stringent controls on the price of goods and services, making them less susceptible to inflation-led fluctuations. This is particularly true for energy and rent prices, where there is a lot of public control. In December of 2022, energy prices in Switzerland rose at a rate of 16.2%, below the levels faced by major peers like Germany, the Netherlands, the U.K., and Italy. Jean-Claude Huber, the manager of Hotel Piz Buin Klosters in the east of Switzerland, said that standardization of long-term energy contracts have sheltered businesses like his from rising costs in 2023. Additionally, the four-star hotel’s dynamic pricing structure means that they have been able to pass on price hikes of around 5-10% to the consumer without hurting demand.
While Swiss consumers have not been totally immune to recent price hikes, some say they are feeling the pinch more than ever. Energy prices, particularly electricity, and some groceries have gotten more expensive, which disproportionately impacts low-income individuals. However, Switzerland’s central bank expects inflation to dip to an average of 2.4% in 2023 before falling to 1.8% in 2024, which should provide some relief.
So, what can other countries learn from the Swiss model? Exchange rate policy may be difficult to imitate, as it is heavily influenced by external factors, but there are still lessons to be learned. For example, other countries may benefit from having a well-functioning social policy that helps to protect low-income individuals from the impact of price hikes. Additionally, some countries may benefit from public control of certain industries, such as energy and rent, in order to prevent short-term price fluctuations.
Overall, while inflation remains a concern for many countries around the world, Switzerland’s relative price stability can be attributed to a combination of factors, including its high starting point for prices, strong currency, well-functioning social policy, and strict controls on the price of goods and services. Other countries can learn from Switzerland’s approach and adapt it to their own unique circumstances in order to promote sustainable economic growth and stability.