The small European nation of Switzerland beat sky-high inflation. Here’s how

ZURICH — As many countries across the globe battle stubbornly high inflation, the rise in prices has been far less dramatic in Switzerland, a small mountainous nation in western Europe.

Inflation in Switzerland hit a 29-year high of 3.5% in 2022. While still high by Swiss standards, it is well below the double-digit rates of other advanced economies, like the U.S. (9.1%), the U.K. (11.1%) and the euro zone (10.6%).

“I think they feel it more abroad than here in Switzerland,” one shopper in Zurich told CNBC last month. “My mother is living in Germany, in Berlin, and she is telling me always [that] everything became so expensive.”

What are the factors that helped shelter Switzerland from rampant inflation? CNBC explores.

Prices starting from a high base

Switzerland is one of the world’s wealthiest countries, with a GDP per capita that outstrips that of other major economies, like the U.S., Japan and Germany.

It is also home to some of the richest citizens in the world, with a mean wealth of $696,604 per adult — and a steep cost-of-living to match. 

The Swiss cities of Zurich and Geneva held steady among the world’s 10 most expensive cities last year, according to the Economist Intelligence Unit, even as inflation pushed up living costs in other pricey places, such as Singapore and New York. 

As a result, Swiss citizens are generally less impacted by price rises, as they tend to spend a lower proportion of their income on essentials such as food and accommodation, versus on discretionary items.

“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,” Tobias Straumann, professor of economic history at the University of Zurich, told CNBC.

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

The stability of the Swiss franc

Another reason for Switzerland’s relative price stability stems from the strong Swiss franc.

The country’s currency has steadily strengthened, rising in value to reach parity against the euro in 2022. While many currencies plunged against an appreciating U.S. dollar, the Swiss franc held steady amid volatility in Europe.

That’s largely due to its status as a “safe haven” currency or defensive asset. The Swiss franc is heavily backed by large reserve of gold, bonds and financial assets, which help the Swiss National Bank ensure the currency’s stability during times of volatility. 

That also benefits Switzerland, an economy heavily dependent on international trade.  

Switzerland imports around $302 billion worth of goods and services each year, the majority of which come from neighboring EU countries. A stronger Swiss franc provides an effective discount on those imports. 

Switzerland meanwhile exports a near equal $305 billion annually — largely comprising higher value goods and services, such as watches and pharmaceuticals, which are less susceptible to price fluctuations than are low-margin, mass-produced commodities.

A resilient energy supply

Switzerland is also less exposed to some of the external factors that pushed prices higher in 2022, such as Russia’s war in Ukraine. 

Home to a mountainous topography and more than 1,500 lakes, Switzerland is less reliant on oil and gas imports than some of its European neighbors, with hydroelectricity playing an important role in its energy supply.

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

At the end of 2022, energy prices in Switzerland rose at a rate of 16.2% — below the levels faced by major peers like Germany (25%), the Netherlands (30%), the U.K. (52.3%) and Italy (64.7%). The country’s energy regulator now expects prices to rise by a further 27% in 2023, with the average household energy bill topping 1,215 Swiss francs ($1,238).

Jean-Claude Huber, manager of Hotel Piz Buin Klosters in the east of Switzerland, said that the standardization of long-term energy contracts has helped shelter businesses like his from any major price rises this year.  

The four-star hotel’s dynamic pricing structure also means that Huber has been able to pass on price hikes of around 5-10% to customers without hurting demand. 

“We can play with the rates much more than if you have fixed rates all the time, and that helps us a lot. I’m sure the costs will be higher than before, but the turnover should be higher as well,” Huber said. 

Price controls on goods and services

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, including food, housing and transport, almost one third (30%) are subject to price regulation in Switzerland — more than in any other European country.

Swiss food prices rose at an annualized rate of 4.0% in December last year, compared with 11.9% in the U.S., 16.9% in the U.K., and 19.8% in Germany. 

High tariffs on certain agricultural imports also mean that domestically produced foods, such as milk and cheese, are preferentially priced and less impacted by movements in global food markets. That, in turn, has helped stimulate the country’s economy.

“We try to buy as much as possible Swiss, but even regional,” Huber said. “Long-term, you want to have a local industry working, functioning.”

Inflation to fall below 2% by 2024

That doesn’t mean that Swiss consumers have been totally immune to recent price hikes. Locals who spoke to CNBC noted a relative rise in the price of rental accommodation, as well as in that of some food products.

“When you’re a tenant ... I think that’s maybe a point which increases a bit,” one shopper told CNBC.

However, the Swiss National Bank said in December that it sees inflation falling to an average of 2.4% in 2023, before reaching 1.8% in 2024.

That would come in under the bank’s 2% target. Still, economists said that is unlikely to hurt the economy.

“Even if we have a kind of recessionary scenario, people are still coming in, and that, of course, stabilizes demand,” Straumann said, referring to the free movement of people across Europe. “I expect the same thing for this year, 2023, and probably also for 2024.”

What other countries can learn from Switzerland

Switzerland’s unique economic landscape is decades in the making and difficult for most countries to replicate wholesale. Its exchange rate policy, for instance, could not be mirrored by the wider euro zone, given the disparate economies involved.

However, Straumann said that the nationalization of Swiss energy provision offered an important lesson to other countries, particularly those nations in Europe that underwent a broad shift to privatization and are now paying the price.

“In the medium to short-term, that was a very good idea,” said of the privatization 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.”