The nation that is winning the war against rampant inflation and cost of living crisis

While Australia battles a rampant cost of living crisis, it could learn a lot from a nation dubbed “the country that inflation forgot”.

Swizerland is known as the “country that inflation forgot”.

As countries like Australia across the globe battle stubbornly high inflation, undoubtedly, the rise has been far less dramatic in some countries.

Inflation in Switzerland now sits at a measly 2.3 per cent — which is far lower than Australia and also the rest of Europe.

For comparison, the UK is at 8.7 per cent, Australia at 7 per cent, Germany at 6.1 per cent and the US at 4 per cent.

While inflation did hit a 29-year high in Switzerland in May 2022 (3.5 per cent) , it was well below the double digit rises in other advanced economies.

In fact, Switzerland is often referred to as the “country inflation forgot”.

Switzerland has done well in tackling inflation. Fabrice Coffrini / AFP

John Hicks, a professor of economics, from Charles Sturt University told news.com.au that “comparing inflation rates across countries is not entirely straightforward”.

“Details of the measure for inflation can vary from country to country,” he said. “Even a focus on one type of measure can be problematic.”

But notwithstanding different economic structures, why does inflation remain so low in the small mountainous nation in western Europe?

Prices start at a high base

Switzerland is one of the wealthiest countries in the world, with a GPD per capita that outstrips other major economies, like the US, Japan and Germany.

Tobias Straumann, a professor of economic history at the University of Zurich told CNBC that because “people are on average quite rich, the share of food in the overall budget of households is not as big as maybe in other countries”.

“We also have inequality of course,” he said. “But from an international perspective we have, I think, a very well-functioning social policy.”

Currency stability

Then there is the stability of the Swiss franc.

The country’s currency has steadily strengthened, rising in value to reach parity against the Euro in 2022.

RMIT associate professor of economics Bilgehan Karabay told news.com.au this stability is largely because the Swiss franc is seen as a “safe haven” which is heavily backed by large reserves of gold, bonds and financial assets.

“It is well integrated with the world economy, but having a strong currency limits the potential ‘import inflation’, that is inflation due to higher imported goods prices,” he said.

Switzerland has been leaning on its domestic hydropower production amid a wider energy crisis in Europe provoked by Russia’s invasion of Ukraine.

Resilient energy supply

Switzerland is also less exposed to some external factors that have pushed prices higher such as Russia’s war in Ukraine.

This is because, according to Prof Karabay, Switzerland’s electricity needs are almost entirely met by hydropower.

This means, compared to other European countries, it has been less affected by the volatile prices of oil, gas and coal.

Swiss energy suppliers are also largely publicly owned, ensuring they are less exposed to extreme market volatility through financial safety nets, while being subject to stricter pricing regulation. 

Inflation in Switzerland now sits at 2.3 per cent. Far lower than the rest of Europe. Picture: AFP

Price controls

Alongside energy, Switzerland also has stringent controls on the price of goods and services, which also makes them less susceptible to inflation-led fluctuations.

Of the core products used to measure inflation in the euro zone, almost one third (30 per cent) are subject to price regulation in Switzerland — more than in any other European country.

What can Australia learn?

Switzerland’s economic landscape is unique. It would be difficult for Australia to replicate it.

Alexandre Jeanneret, associate professor of finance at the University of New South Wales, told news.com.au there are “fundamental characteristics of countries that are not easily altered”.

“It would be overly simplistic to assume that Australia could replicate the economic approach of other countries like Switzerland,” he said.

“Each economy possesses distinct industrial bases, immigration dynamics, and political situations.”

He also said the RBA’s approach of cooling down the economy to address inflationary pressure “assumes inflation in Australia is mostly driven by local demand forces, neglecting significant contribution of global supply-related bottlenecks”.

RBA governor Phil Lowe. Picture: Britta Campion / The Australian

But Prof Straumann told CNBC the nationalisation of Swiss energy provision was an important lesson to other countries, particularly those nations in Europe that underwent a broad shift to privatisation and are now paying the price.

“In the medium to short-term, that was a very good idea,” he said of the privatisation of energy supply. “But it’s not very resilient and they are haunted by that now.”

“At the time, many people said the Swiss are too conservative,” he added. “But I’d say in retrospect it was a very good decision.”

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Originally published as The nation that is winning the war against rampant inflation and cost of living crisis