Why are stable prices important?
Inflation is sand in the works of an economy. Under high inflation, the economically vulnerable sections of society suffer disproportionately. This is why the SNB is tasked with ensuring price stability.
With stable prices, money retains its value over time. This gives companies and households the certainty that their money will buy them roughly as much tomorrow as today. Businesses are thus able to make reliable plans for the future, and people do not need to worry about the purchasing power of their salaries.
No sand in the works
We call it inflation when prices rise noticeably over a sustained period. If, on the other hand, they fall over a longer period of time, we call that deflation. Both of these – inflation and deflation – distort price structures; prices become less informative, and companies find it harder to plan. They also lead to a redistribution of wealth and income that particularly disadvantages those who are economically vulnerable, since they have fewer opportunities to provide themselves with security.
Stable prices mean stable purchasing power
The SNB has therefore been tasked by legislators with ensuring price stability in Switzerland, which it defines as an annual rise in consumer prices of less than 2%.
Rule of thumb: How long does it take for the purchasing power of one Swiss franc to be reduced by half?
- With an annual inflation rate of 1%, it takes 70 years
- With an annual inflation rate of 2%, it takes 35 years
- With an annual inflation rate of 5%, it takes 15 years
- With an annual inflation rate of 10%, it takes 7 years
Price stability means that the level of prices remains unchanged. It also means that while the prices of individual goods may certainly fluctuate, the average of all prices changes so little that it hardly matters in everyday life.
Good to know
Each month, the Swiss Federal Statistical Office determines the price development of a basket of goods typically purchased by households in Switzerland. The prices of 100,000 products or services such as groceries, transport and leisure activities are collected at 5,400 locations. This information is used to generate the Swiss consumer price index (CPI), which measures how prices of products and services are developing on average. If the CPI rises, goods are becoming more expensive and household purchasing power is falling.
The SNB analyses and explains
At its quarterly monetary policy assessments, the SNB conducts an in-depth analysis of the current economic situation and presents its forecast of future price developments. If that forecast suggests that inflation is threatening to rise above 2% and remain there, the SNB tightens its monetary policy. On the other hand, it will loosen its monetary policy if the price level declines over a sustained period. The SNB informs the public of its monetary policy decisions and explains the reasons for them.
55 billion marks
That’s how much a loaf of bread cost in Germany in 1923. The country was suffering from hyperinflation at the time, an extreme form of inflation characterised by prices rising increasingly quickly and citizens’ purchasing power plunging. Unfortunately, hyperinflation is not simply a phenomenon of times gone by. In the recent past, countries in Africa and Latin America, for example, have struggled with it.
