Inflation VI: Why is the rise in oil prices not having a stronger impact in Switzerland?

Small flashback: while prices in the euro area rose by 5.1% in January 2022 and even by 7.5% in the United States compared to the same period of 2021, inflation in Switzerland was 1.6%, which is relatively low is. We identified four reasons for the rise in inflation in the United States: rising commodity prices, supply difficulties, ultra-expansive monetary policy and government action. Let’s focus on the first reason: the rise in commodity prices, especially oil. Why is it fueling inflation less in Switzerland than abroad?

If prices on the international oil exchanges do not influence current Swiss inflation, it is essentially for the following five reasons:

Reason 1: The Swiss franc is relatively strong. This means that the imports cost us less than if our currency were weak. At an exchange rate of 1.70 CHF to one US dollar – as in 2001 – and an increase in the price of a barrel of oil from 30 to 120 US dollars, the barrel in Switzerland would cost the equivalent of 153 francs. On the other hand, at an exchange rate of 0.92, a barrel of oil costs “only” 83 francs. In other words, a strong currency allows us to have high purchasing power on an international scale. (Note that these numbers are nominal, meaning they have not been adjusted for inflation. In real terms, the Swiss franc is not that strong.)

Reason 2: The Swiss economy is more energy efficient than, for example, the US or Germany. We use less energy to produce goods and services. A comparison shows that the production of goods and services in Germany costs more than twice as much energy as in Switzerland:

Fossil fuels still make up a significant part of energy consumption. However, the prices of oil, gas or coal are highly correlated, at least for now. Therefore producer prices in Switzerland react less strongly to an increase in the oil price than in Germany. Over time, an increase in producer prices leads to an increase in consumer prices.

Reason 3: Consumers in Switzerland spend less on fossil fuels than their counterparts in Germany or the United States. High wages, as well as the strong franc (reason 1) and energy efficiency (reason 2), essentially explain the fact that fossil fuels represent a relatively small share of all purchased goods and services. The weight of fuels and fossil fuels in the Swiss consumer price index is only 3.03%. In Germany this percentage is 7.11%, in the United States 4.97%.

Reason 4: As a reminder, inflation measures the increase (in %) of the final selling price. And Switzerland has high taxes on fossil fuels. So if oil prices on the international markets rise, the price of heating oil or diesel in Switzerland rises less sharply. Example: the liter of diesel is currently taxable for a total amount of 76.32 cents. If a liter of diesel costs 50 cents, the final sale price including 7.7% VAT is 1.36 francs [(0,50 + 76,32) x 1,077]† If the oil price rises by 100% and goes from 0.5 to 1.0 francs, the price at the pump of a liter of diesel rises to 1.90 francs (1.077 x 1.7632). However, the price taken into account in the national consumer price index increases “only” by 40% (1.90 / 1.36 – 1).

Reason 5: Electricity prices react with a delay to gas and oil price increases. Many Swiss cannot choose their electricity supplier and pay the so-called cost price and not the market price. The cost price has been higher than the market price in recent years, but has now reversed. The rates for 2022 were determined in September 2021. It will therefore take some time before a higher price on the electricity market, largely determined by the price of gas in Europe, is passed on to the Swiss end user.

As a result, oil and gas price increases in Switzerland are less reflected in inflation than in other countries. But sooner or later they still make themselves felt. The war in Ukraine will also trigger a wave of inflation at home. Don’t let a false sense of security creep in. Black gold, as it was once called, will remain important to the global economy for years to come.


Episode I: Beware of Monetary Illusions: The Franc Isn’t As Strong As It Was In 2015

Episode II: Four Explanations of Record Inflation in the US

Episode III: “This Time It’s Different”, Really?

Episode IV: A Phenomenon That Isn’t Neutral, But Rather Harmful In Reality

Episode V: The Independent SNB Strikes Back

Episode VI: Why isn’t the rise in oil prices having a stronger impact in Switzerland?

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