Inflation highs sound no alarm bells

Swiss shoppers don't face spiralling prices, according to economists Keystone

Economists remain unmoved about the long-term effects of rising inflation despite prices reaching a 15-year high of 3.1 per cent in Switzerland.

Increasing energy costs have been blamed for the latest hike but a recent drop in oil prices, the stability of non-seasonal core inflation rates and restrained wage increases have dampened fears of a spiralling problem.

The Federal Statistics Office reported on Thursday that July inflation rates were the highest in Switzerland since a peak of 3.4 per cent in 1993.

Prices for transportation, housing, energy and communication all rose with the cost of heating oil now 67 per cent higher than in July last year. Global oil prices hit an all-time high of $147 (SFr154) per barrel in mid-July before easing off.

But the Swiss National Bank (SNB) kept its key interest rate of 2.75 per cent on hold last month despite raising its annual inflation prognosis from 2.4 per cent to 2.7 per cent. The Bank predicted that the current high inflationary pressures would ease by the end of the year and into 2009.

Credit Suisse bank senior economist Claude Maurer believes a modest interest rate hike is possible in September. But he told swissinfo that core inflation – excluding volatile components such as seasonal foods, tobacco, beverages and energy – remained stable.

“The latest inflation data is not alarming as it represents a temporary shock from oil prices and some food components. We predict that if oil prices continue to lose ground then consumer prices will also decrease,” he said.

“What would be a danger is if we see second-round effects from general consumer prices and wages, but we can’t see too many signals from that side. The figures from July show that restaurant prices were lower so the shock has not yet seeped through to the rest of the economy.”

Wage pressures

Many observers also believe that a general dampening of the Swiss economy will eventually act as a brake against inflation.

But this has not stopped unions demanding higher-than-average pay increases during the next round of negotiations this autumn to make up for reduced spending power of workers as a result of rising inflation.

Official data show that real wages (taking inflation into account) rose to 0.9 per cent last year from 0.1 per cent in 2006.

But the Federal Statistics Office noted in a July report that low rates of inflation last year were partially responsible for this increase. It believes that estimated wage hikes of 2.2 per cent this year would be annulled by an inflation rate of 2.5 per cent.

The rumblings of discontent erupted into a row between the SNB and Switzerland’s trade union umbrella group, Travail Suisse, earlier this month. The union described comments from an SNB director urging for pay restraint as “outrageous”.

Johann Schneider-Ammann, president of the Swissmem machinery, electrical and metal industries representative body, has recently stated that large pay increases would damage companies as well as employees.

swissinfo, Matthew Allen in Zurich

Key facts

Inflation forecasts:

SNB: 2.7% (2008), 1.7% (2009)
BAK Basel: 2.4%, 1.6%
Swiss economic Institute (KOF): 2.6%, 1.4%
State Secretariat for Economic Affairs (Seco): 2.5%, 1.3%
Credit Suisse: 2.2%, 1.4%

Swiss National Bank

Switzerland’s central bank is independent of the government and is free to set interest rates.

Its policy goal is price stability, which it says is an important precondition for economic growth and prosperity. Its target threshold for annual inflation is 2% – which has been achieved every year since 1993.

It bases its monetary policy on a medium-term inflation forecast.

Its chosen reference interest is the three-month Libor rate (London Interbank Offered Rate).