What factors could bring down Swiss inflation?

According to a survey by the Swiss State Secretariat for Economic Affairs (SECO), high inflation remains a major concern for Swiss households despite the decline in recent months. Indeed, while lower than Swiss National Bank expectations for the second quarter, inflation in April was 2.6% year-on-year, once again outside the target range of 0-2%.

However, three factors should help inflation to decline towards the midpoint of the target range over the next few months. First, the Swiss franc has appreciated by around 10% against the currencies of major trading partners over the past twelve months. The strength of the franc will dampen the prices of imported goods and services, which account for about one quarter of the Swiss CPI basket.

The second factor is the fall in energy prices. Chart 1 shows the price of Brent oil in Swiss francs and the Swiss CPI components for petrol and diesel. Changes in the price of Brent lead trends in retail fuel prices, with about 40% of the change in the former passed on to the latter. This is consistent with a tax component of around 50% of the retail price of fuel. The graph shows that the fuel CPI could drop by about 10% in the near term. Statistical analysis estimates that such a shock would be transmitted to other sectors of the economy, reducing consumer prices by about one percentage point over a year.¹

Chart 1. Oil and Swiss fuel prices (Jan 2021=100)

Source: Refinitiv and EFGAM calculations.

The third factor relates to agricultural goods prices. Chart 2 shows the annual change in the Swiss franc price of a sample of agricultural goods traded in the eurozone, the source of many Swiss imports.² The eurozone food price trend is advanced by nine months and shows a strong correlation with annual changes in the Swiss food CPI up to the pandemic period. In the absence of new shocks to eurozone agricultural goods prices, it is reasonable to expect that the Swiss food CPI will continue to moderate as 2023 progresses.

Chart 2. Eurozone food prices and Swiss food CPI (yoy)

Source: EU Commission Directorate-General for Agriculture and Rural Development, Refinitiv, and EFGAM calculations.

To conclude, Swiss inflation has moderated from the peak in 2022 but remains a concern for the Swiss public. However, several factors suggest inflation will continue to fall in the remainder of 2023 to levels consistent with the SNB’s definition of price stability.

¹ A VAR(4) model is estimated on the CPI of fuels and the CPI of services, goods less food and energy, and food and beverage. All variables are quarterly averages and the sample spans from 2006Q1 to 2023Q1. The correlation matrix of the model variables suggests that shocks to CPI fuels come first, followed by that of goods less food and energy, services less energy, and food and beverage.
² The sample of agricultural goods includes: bread wheat, butter, carrots, chicken, durum wheat, eggs, feed barley, feed maize, feed wheat, lemons, milk powder, mushroom, onions, piglets, raw milk, sugar, tomatoes, and young bovines.