Switzerland lies in the heart of Europe and, although not a member of the EU, is economically closely intertwined with its neighbors.

Despite this, the Confederation has so far been hit far less severely by inflation than Germany.

In June, consumer prices rose by 3.4 percent compared to the corresponding month of the previous year.

For Switzerland, this is the strongest inflation since 1993. But in the euro zone and in the United States, the increase was 8.6 percent each over the same period.

John Knight

Correspondent for politics and economy in Switzerland.

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There are a number of reasons for the comparatively low inflation in Switzerland.

Most important is the reduced role of energy, the main driver of inflation around the world.

The import prices for heating oil and natural gas have also risen rapidly in Switzerland.

But energy expenditure is much less important in Swiss households' shopping baskets than elsewhere.

Alessandro Bee, economist at the Swiss bank UBS, estimates the share at 5.5 percent, while energy sources make up around 11 percent of the shopping basket in the EU and 12 percent in Germany.

In addition, Switzerland covers most of its electricity needs from domestic hydropower and nuclear power.

In Germany, on the other hand, a lot of electricity is produced with gas.

In winter, however, Switzerland has to import additional electricity from abroad.

So far, however, the increase in the price of imports, which began last autumn, has hardly reached consumers.

This is because the Swiss electricity market is heavily regulated.

Only large customers who consume more than 100,000 kilowatt hours of electricity per year are free to choose their provider.

Private households and small businesses are tied to local suppliers.

However, they are only allowed to adjust the prices once a year.

At the most recent date in August 2021, the price increase in electricity purchases for the suppliers was not yet foreseeable.

By the next deadline in the coming month, however, they will be able to apply to the responsible Federal Electricity Commission for price increases one after the other.

Protection from international competition

State regulation and protectionism also contribute to the fact that food prices in Switzerland have barely risen to date.

Local farmers are protected from international competition by high subsidies and tariffs.

The usually significantly cheaper foreign agricultural products are brought to the high price level of Swiss producers by means of customs duties.

ETH economist Alexander Rathke recently explained that when the world market price for imported vegetables, fruit or grain rises, only the customs duty falls.

In other words: Unlike many Germans, the Swiss have so far been spared the price shock at the grocery counter.

This in turn pleases the domestic retail trade: the significant increase in food prices abroad is slowing down the flow of Swiss shopping tourists to Germany.

The strong Swiss franc, which has meanwhile reached parity with the euro, is also acting as an inflation dampener.

Because a strong franc makes imports from abroad cheaper.

The Swiss National Bank (SNB) had this effect in mind when it raised the key interest rate by half a percentage point to minus 0.25 percent in mid-June.

Immediately after this change in monetary policy, the Swiss currency appreciated.

According to calculations by Maxime Botteron, economist at Credit Suisse, a 10 percent fall in the euro-franc exchange rate reduces inflation in Switzerland by half a percentage point.

The inflation of 3.4 percent measured in June is still well above the range of 0 to 2 percent that the SNB considers desirable under the heading "Price stability".

The Swiss central bank will therefore probably soon continue to tighten interest rates.

Daniel Kalt, chief economist at UBS Switzerland, expects “that the SNB will continue its resolute monetary policy and increase the key interest rate to 0.75 percent by March 2023”.

With this "preventive step" inflation should drop to 1.5 percent in the coming year, estimates Kalt.

For the current year, he estimates the inflation rate at 2.7 percent.

The economists at Credit Suisse also expect inflation in Switzerland to fall below the 2 percent mark in the first quarter of 2023.