Swiss inflation drops sharply to two-year low

Swiss consumer price inflation continued its steep decline in January and hit a fresh 2-year low due to cheaper oil and winter sales of clothes, data showed on Tuesday. While the headline annual inflation rate dropped to a mere 0.1 percent, core inflation - stripping out volatile prices such as energy or food - was well above 1 percent, indicating that the country was still well clear of harmful deflation.
Consumer prices fell 0.8 percent compared with December, taking the annual inflation rate down to its lowest level since February 2007, the Federal Statistics Office said on Tuesday. The inflation rate was also far below the economists' median forecast of 0.6 percent in a Reuters poll and the December figure of 0.7 percent. However, the Swiss National Bank was likely to focus on the core inflation rate, UBS analyst Reto Huenerwadel said.
"So even though these are spectacular figures, they will not be such a huge concern for the SNB," he said. SNB officials have said repeatedly in recent weeks that they would not hesitate to turn to drastic unconventional measures such as market interventions should the country face the danger of deflation.
A recent study from the International Monetary Fund (IMF) ranked Switzerland among the top 10 candidates for deflation, though the IMF's indicator for the country's deflation risk was below the levels of the 2003 recession. Core inflation stripping out food, energy, fuel and seasonal products was 1.3 percent, unchanged from December. Core inflation also stripping out administered prices dipped a notch to 1.6 percent.
Sarasin economist Alessandro Bee said core inflation was set to ease further in coming months as the global economic downturn was dragging the Alpine economy into recession. The downturn might already have had an impact on price setting, Bee said. "Retailers have probably noticed that sentiment is getting worse and therefore extended the sales." The Swiss central bank is likely to lower its inflation forecast due to the recent rapid decline, Bee said.
Inflation has dropped quickly from the 15-year high of 3.1 percent hit last July. So far, the central bank expects falling prices year-on-year during this summer due to the base effect from last year's record oil prices. The SNB, which has slashed interest rates aggressively to support the slowing economy, in December forecast inflation to average 0.9 percent in 2009 and 0.5 percent in 2010 and will update its forecasts at its next policy meeting on Mar. 12.