“Why Is Inflation in Switzerland Lower Than in Germany or the Euro Zone?”

In Switzerland, inflation fell to 2.9 percent in March after rising in the first two months of the year. Why is inflation there much lower than in Germany or the euro zone?

The inflation rate in Switzerland fell to 2.9 percent in March, the Swiss Federal Statistical Office (BFS) announced today. In February, the inflation rate was still 3.4 percent. It rose significantly in the first two months of the year, among other things due to higher electricity and flight prices; now the inflation rate is back to what it was in December.

Imported goods in particular are still significantly more expensive in Switzerland than they were a year ago, rising by 3.8 percent, while domestic goods cost 2.7 percent more than in March 2022. However, both values ​​are lower than in February. Core inflation, which excludes volatile commodities such as food, energy and fuel, also fell to 2.2 percent in March from 2.4 percent in February.

Strong franc protects Switzerland

Consumer prices have recently fallen again in Germany and the euro zone. The inflation rate in the euro zone fell from 8.5 percent to 6.9 percent in March. In Germany it fell from 8.7 percent in February to the current 7.4 percent. However, it is noticeable that they reached and maintained a significantly higher level compared to Switzerland.

There are plausible reasons for the different severity with which inflation hits the two currency areas. An important factor is the strength of the Swiss currency against the European common currency. The Swiss franc has also recently shown itself to be more robust against the dollar.

This has consequences for import prices, because goods delivered from outside Switzerland are cheaper: the exchange rate is an important component of Swiss inflation, says Stéphane Monier, financial expert at Lombard Odier Private Bank. A strong currency keeps imports as cheap as possible and curbs consumer prices, Monier said.

High prices due to protectionism

Another factor are protectionist measures with which Switzerland protects its own markets. According to experts, this applies in particular to food prices, which are rising less than in the euro zone, where they have risen sharply: A Swiss financial expert emphasizes that the protectionist measures have decoupled Swiss food prices from developments on the world market.

The Swiss raise the price of foreign agricultural products that are also produced domestically to the higher Swiss level through import duties in order to protect domestic grain, fruit and vegetable farmers from foreign competition.

“If the price for goods that we produce ourselves rises on the world market, only the customs duty falls,” says Alexander Rathke from the Economic Research Center at ETH University. But there are side effects: “The prices are now more stable, but the price level is always higher,” says Rathke.

Energy prices less effective

The different weightings in the shopping baskets between the euro zone, Switzerland and Germany also play a role. Energy prices, for example, have a lower weighting in Switzerland, which has a direct impact on the calculations.

But differences in power generation also have noticeable effects. While Switzerland covers almost all of its electricity needs from hydroelectric and nuclear power, in Germany, for example, a lot of electricity is produced using gas. That is why the gas prices that rose in connection with the Ukraine war had a much clearer impact on inflation in this country.