Quick comment: Swiss inflation in May
Punchline: Less downward pressure on inflation than I had expected.
The Swiss CPI for May was published yesterday. As the final release before the SNB’s monetary policy assessment on June 19, it was closely watched. Headline inflation behaved as anticipated by many commentators, falling from 0.03% year-on-year in April to -0.10% in May.
As I have argued in a post earlier, disaggregating inflation into its components is helpful for assessing the outlook for monetary policy (see graph below). While imported and goods inflation in Switzerland were both negative in May (‑2.40% and ‑1.91%, YoY), they were less negative than in April (‑2.48% and ‑2.03% YoY). Domestic and services inflation remained positive at 0.62% and 1.05% but again eased from April’s 0.83% and 1.36%.
The key question for the SNB is what is driving the decline in inflation. A drop driven by a stronger franc or lower energy prices is far less troubling than one stemming from falling prices for domestic services, which would signal shrinking markups and downward wage pressure due to weak aggregate demand.
In my view, most of the disinflation reflects external factors rather than a softening of the domestic economy. As I will argue in my regular post next Monday, this is not the time for the SNB to overreact with a 50 basis point cut in interest rates.
Source: BfS
Inflation has been low in Switzerland partly because the way the SNB manages its reserve assets and the appreciation of the Swiss franc versus major currencies, which has been partly driven by this. The CHF is also a safe haven currency, and given the current geopolitical climate, naturally this has only serve to further strengthen the CHF. So that's why Switzerland is importing deflation, rather than experiencing slowing economic growth.
I think that should be "... imported and goods inflation were ... less negative ..."