Deflationary Risks? Comparing Swiss, Swedish and Norwegian Inflation and Exchange Rates

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George Dorgan
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When the Swiss National Bank introduced the 1.20 lower limit, it wanted to eliminate the deflationary risks for Switzerland. For a certain period, namely when a global recession was looming in Autumn 2011, and the Swiss franc was hovering around 1.10, this risk was really present. In this post we would like to know if these risks still exist today. This gives a hint when the SNB must remove the peg.

For this sake, we compare three countries, Switzerland, Sweden and Norway against the euro zone. The following is the relative exchange rate for these countries against the euro since stock markets started to improve in March 2009.

Exchange Rate EUR/CHF EUR/NOK EUR/SEK since March 2009

After the EUR/CHF overshot in August/September 2011, the exchange rate improvement of the Swissie was limited by the SNB at 24% against the euro (compared to March 2009).

The EUR/SEK and the EUR/NOK were allowed to continuously appreciate. It is visible that investors replaced the Swissie with NOK and SEK in September 2011, after the SNB floor introduction. But when the world economy seemed to go into recession and oil and stock markets fell, both Scandinavian currencies fell again.

Our second look is on different inflation figures, on consumer, producer and house prices and on wages.

sources Eurostat, Swiss, Sweden and Norway Statistics

We used local CPIs for Sweden and Norway that include owner-occupied rent. For Switzerland and the euro zone (the “HPCI”)  these items are excluded. It is visible that none of these three countries show deflationary risks. Especially house prices and wages, that have a longer-term effect on consumer price levels, are still strongly rising.

In the European periphery things are different: Spanish house prices are falling by nearly 10% per year and salaries must go down according to the policy makers. Thanks to rising oil and food prices and imports from Germany and other Northern euro members, the whole Spanish and Greek CPI is not (yet) in deflation.

Out of our three countries, only Sweden has one indicator in deflation: after the strong appreciation of the Krona, producer prices are still falling.

House prices in the euro zone have two different tendencies:

House Prices Germany 7 cities vs. Greece - Click to enlarge

The recent increase of the EUR/CHF exchange by 3% from 1.20 to 1.24  will further push Swiss inflation upwards, given that imports take nearly 30%. This may neutralize the tendency that exchange rate changes arrive at the consumer only very slowly, visible above in the difference between consumer and producer prices. Hence this might push Swiss total inflation by 1% upwards and cause that inflationary tendencies clearly outweigh deflationary ones (see drivers of Swiss inflation).

While the SNB sees CPI inflation falling by 0.4% in 2013, UBS thinks it will increase by 0.6%, the BAK Basel speaks of 0.2%.

About George Dorgan

George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.

My articlesMy siteAbout meMy books
Follow on:LinkedINTwitterSeeking AlphaCFA SocietyEconomicBlogs