Swiss inflation rebound is temporary

In January, Swiss inflation rose more than expected to 3.3% year-on-year (yoy) from 2.8% in December. Core inflation also rose to 2.2% from 2%, exceeding again the upper end of the SNB’s 0-2% target range.

At the headline level, the increase can be attributed to administered prices, driven by the 25.5% increase in electricity bills. The increase was announced last September and reflects the surge in the price of imported electricity from the rest of Europe. However, tensions in the European electricity market have eased and the recent trend makes it unlikely Swiss electricity prices will rise further.

Figure 1. Swiss prices inflation (yoy)

Source: Refinitiv and EFGAM calculations.

Food prices were the other main driver of the rebound in inflation. Imported food prices from Europe have risen due to higher costs related to energy and fertiliser. And the pass-through from Swiss food retailers of higher electricity bills into food prices appears to have played a role.

Stripping out food and energy prices, the Swiss inflation rate is stable at 1.8% yoy. Looking ahead, in the absence of new shocks, a favourable base effect linked to easing global supply chain bottlenecks, normalisation in services demand, and lower pass-through of past energy shocks will drive underlying inflation towards the mid-point of the SNB’s target range.

Figure 2. Swiss underlying inflation and interest rates

Source: Refinitiv and EFGAM calculations.

What is the implication for the next SNB monetary policy decision? January inflation rose above the SNB’s December conditional forecast of 3% yoy on average in 2023Q1. Such high inflation requires higher interest rates to return it within the target range. Markets appear to expect that and attach a 66% probability to the SNB raising rates by 0.50% in March, with the alternative being a smaller 0.25% move.

However, with inflationary pressures clearly easing, at its March monetary policy meeting the SNB may conclude that a slower adjustment to interest rates than in recent months may be appropriate to limit the risk of overtightening. A further downshift to the standard 0.25% step at a time would not be surprising and would be a welcome sign of normalisation.