At the end of October 2021, annual inflation in Switzerland reached 1.2% after rising 0.3% over the month, according to the Federal Statistical Office. This is the highest the annual rate has been since August 2018 when it reached 1.2%.
The price rises hitting Swiss pockets the hardest over the last 12 months include rent (+1.4%), heating (+12.0%) and transport (+7.3%). Rising fuel prices are behind the jumps in heating and transport costs. On the other hand, food prices have declined (-2.0%). These items have an outsized impact on household budgets because of the high proportion of spending that is dedicated to them.
In recent years in Switzerland prices have fallen more than they have risen. Since the end of 2010 cumulative inflation in Switzerland has been -0.3%. Over this period, prices have declined in more months than they have risen. However, inflation has risen in 8 or the 10 months since the end of 2020, adding up to cumulative rise of 1.6% between the end of December 2020 and the end of October 2021.
Ensuring price stability in Switzerland is the task of the Swiss National Bank (SNB). An annual inflation rate of 1.2% remains within the SNB’s definition of price stability, which it defines as a rise in the Swiss consumer price index (CPI) of less than 2% per annum. In September 2021, the SNB said that it is maintaining its expansionary monetary policy with a view to ensuring price stability and providing ongoing support to the Swiss economy in its recovery from the impact of the coronavirus pandemic.
In the same announcement the bank said it is keeping the SNB policy rate and interest on sight deposits at the SNB at −0.75%, and remains willing to intervene in the foreign exchange market as necessary, in order to counter upward pressure on the Swiss franc, which it said remains highly valued.
Currently, the SNB appears to be more concerned by the high value of the Swiss franc than inflation.
In September 2021, the SNB was not forecasting high near term inflation. Its inflation forecasts were 0.5% for 2021, 0.7% for 2022, and 0.6% for 2023. The last two months of 2021 would need to bring price deflation of 0.7% to reach the SNB’s forecast of 0.5% inflation for 2021.
Inflation hawks are often concerned about wage increases driven by the inflation expectations of workers. If workers become convinced that inflation is coming and manage to negotiate higher wages to compensate for it, there is a risk of a self fulfilling inflationary feedback loop setting in. As workers earn more they spend more, which drives up inflation, which in turn leads to demands for further wage hikes. And the cycle repeats. The risk of this happening is higher when wages are indexed to inflation or when workers are in a dominent negotiating position.
Some workers in Switzerland are beginning to demand higher wages. Last weekend more than 12,500 people took to the streets of Geneva, Bern, Zurich, Olten and Bellinzona, reported RTS. The protests were called by the Unia and Syna unions. In addition, healthcare workers have organised a referendum on 28 November 2021 aimed at improving their working conditions that could lead to higher pay in the sector.
Higher inflation can also lead to higher interest rates, particularly on longer term fixed interest rate loans. This is starting to appear in rising Swiss mortgage rates, especially on longer term fixed rate mortgages. Over the 12 months to the end of October 2021, average 10-year fixed mortgage rates in Switzerland rose from 1.04% to 1.26%. However, rate rises on shorter term fixed rates have been smaller. 5-year fixed rates moved from 0.91% to 0.97% and 1-year rates from 0.86% to 0.87% over the same 12 month period – rates from Comparis.