Inflation has always been a concern for many economies, especially underdeveloped and developing economies. In 2022, Inflation became a pressing global issue, which is now the leading economic problem in advanced economies as well.
To understand what is causing inflation and the factors accelerating inflation levels in many economies, it is imperative to learn from the examples of countries that have successfully controlled it, like Switzerland.
What is Switzerland doing right that is protecting it from this inflation storm affecting even advanced economies of the world?
Inflation | Highlight of 2022
Inflation is the rising prices of goods and services in a country, which is measured using the Consumer Price Index (CPI). CPI uses a selected basket of goods and services to measure consumer price changes.
Generally, CPI indicates the spending habits of people in a country. For example, for an underdeveloped or developing economy, the consumer would be spending more on necessities, thus, more necessary items and their prices will be taken into consideration to measure CPI.
Inflation has always been a major dilemma for many countries. In 2022, we saw even stable and advanced economies be affected by the rising prices of commodities. The cost of goods and services in developed economies is experiencing a double-digit rise, while many developing economies are not safe from rising inflation too.
Still, somehow, some economies have been able to protect themselves from the high inflation rates in the world. These economies are doing something right, which we need to understand if we want to fix our economies.
Truth be told, it is impossible to adopt the policies of Switzerland, other European countries, and even China in our economies to battle inflation. Still, we can learn a thing or two from them to better deal with growing inflation concerns.
So, let’s get on with why inflation is no longer a problem for Switzerland.
Wealthier Households in Switzerland
Switzerland has the wealthiest citizens in the world with high incomes. For any wealthy household, necessities do not constitute a big portion of their expenditures. For rich households like Switzerland, essentials take a small portion of their income, while most of their earnings are spent on luxury items, which they can stop spending if prices increase. So, such wealthy households make the Swiss economy less prone to inflation.
For example, eating out at restaurants is a luxury, which wealthy households can afford. They can stop eating out and start preparing food at home if the prices increase at restaurants.
On the other hand, for poor households, a rise in restaurant prices will not have a huge impact on them as compared to the rise in necessities prices. If prices of essentials increase, poor households have to bear them due to a lack of alternatives, thus such economies are more susceptible to inflation.
The Swiss Franc Is Stable
The Swiss Franc is relatively more stable than any other currency in the world. Swiss Central Bank backs it with large reserves of gold, real estate, financial assets, and bonds. Swiss bank makes sure to keep the stability of the Swiss currency in the Foreign Exchange Market to prevent any inflation.
For example, the Central Bank sells the assets for the Swiss Francs if it detects the currency is losing its value. Similarly, if the value of currency starts getting higher, the Central Bank starts buying assets with Francs.
Switzerland Does a Lot of Trade Yet Controls Inflation
If you look into Switzerland’s imports — the items like gold, cars and car parts, machinery, metal, and chemical products mainly constitute its imports. Switzerland’s imports come from its neighboring EU countries directly via trains and trucks, ruling out any unnecessary delays caused by ports, distribution centers, or other supply-chain issues associated with international trade that lead to increases in prices.
Another noteworthy factor is that Switzerland’s main imports do not consist of necessary items. So, people can stop consuming them or resort to cheaper substitutes if their prices increase, thus preventing imported inflation.
On the other hand, Switzerland exports high-end items like watches, gold, and jewelry that are least affected by factors affecting usual low-margin commodities. Similarly, pharmaceuticals also represent a major portion of Swiss exports.
Furthermore, the Swiss currency is so stable, which allows the country to get further discounts on their import deals with other EU countries preventing any price increases.
Switzerland Uses Clean Energy
Switzerland uses hydroelectric power instead of fossil fuel to produce energy. The volatility in oil and gas prices does not shoot up prices in the country like in other European countries.
Other Factors That Make Switzerland Stand Out
- It has a GDP per capita of US 93,457 dollars (the highest in the world).
- Citizens in Switzerland work in high-tech industries.
- The economy is stable and credible, which is why it is home to many financial operations.
- Growth is consistent yet slow as compared to its other European counterparts.
- Swiss products are well-renowned in the world — Swiss bankers are the best, and so are Swiss chocolates and watches.
Final Thoughts | What Should The World Learn From Switzerland?
Despite, being a country that has successfully sustained a low inflation level and produces one of the richest citizens in the world, Switzerland struggles with deflation which is hampering the economic growth in the country. Switzerland efficaciously maintains low inflation but at the cost of slower economic growth.
Still, it is not of much concern for Switzerland as it has a stable economy with the wealthiest citizens with high living standards than any place in the world. Not only this, the country has the highest GDP per capita in the world
Switzerland has remarkably achieved the waking dream of many economies in the world. Every nation should try to learn a thing or two from the Swiss economy to offset the rising prices of goods and services in their economies.