Inflation is falling in the euro area and in the USA, while it is stagnating at a low level in Switzerland. Confidence is therefore growing on the financial market that the period of rising key interest rates will soon be over. But it is too early to give the all-clear.
The high inflation is likely to cause resentment for some time to come, as here at a demonstration in Berlin.
Can we finally take a deep breath in view of inflation? The impression is obvious when the financial market is used as a benchmark. Share prices there have recovered significantly since September. The main reason for the rising prices is the hope that the inflation problem will soon become less acute and that the tightening of monetary policy will come to an end as a result. However tempting this scenario may seem, there are no signs of a quick solution to the problem of far too high inflation.
Inflation seeps through the system
At least it is positive that inflation has recently fallen slightly. In the euro zone, annual inflation fell from 10.6 to 10.0 percent in November. In the US, where November data are not yet available, inflation fell from 8.2 to 7.7 percent in October. And in Switzerland, the increase in consumer prices did not fall in November, but remained at a relatively low level of 3 percent. Nevertheless, inflation in this country is well above the Swiss National Bank’s target range.
Don’t be misled by this snapshot. Firstly, the loss of purchasing power of money is still extremely high. And secondly, the positive data comes with the risk that the persistence of inflation will once again be underestimated. Because naturally it takes a long time before higher purchasing costs, increased wages or supply chain problems seep through all channels of the economy and eventually lead to inflation. This process is far from over.
Pent-up inflation due to administered prices
The viscosity is also evident in Switzerland. Here, inflation has managed to move away from this year’s high of 3.5 percent. This does not mean, however, that inflation will continue to fall steadily. In this country, a large number of prizes are administered by the state. These prices, which account for around a quarter of the national index of consumer prices, are not formed daily on the market depending on supply and demand, but are decreed by the government at intervals of several months.
A well-known example is the electricity price, which according to the Federal Electricity Commission will rise by an average of 27 percent in the coming year. This price increase alone is likely to push Swiss inflation up by an estimated 0.5 percentage points in January. But there is also pent-up inflation in healthcare or on the housing market, where landlords are only allowed to raise rents after the reference interest rate has risen. If – as is generally expected – there is an increase of this kind for the first time in March, rental costs will also have a stronger inflation-driving effect.
Risk of persistently high base inflation
Inflation is likely to fall in the coming year, in Switzerland as elsewhere. But the decline will probably be sluggish. In many places, inflation has already become entrenched in the economic structure. If the economists’ forecasts are to be believed, the goal of price stability will not be achieved by the end of 2023 either in the euro area or in the USA. Although the highest price peaks will have broken, what will remain is a relatively high level of base inflation that is difficult to combat.
Hopes that interest rate hikes will end soon are correspondingly deceptive. If the central banks are serious about fighting inflation, they will have to consistently continue to tighten monetary policy in 2023, regardless of a possible recession. The central bankers emphasize at every opportunity that they intend to do so. But many investors only hear what they want to hear. Accordingly, they draw courage from every hint, no matter how vague, of a trend reversal. As understandable as this reflex may be, the associated risk of severe disappointment is just as great.