Understanding inflation and how to profit from it

What is inflation and how does it occur? How high is the inflation rate in Switzerland? We provide facts and show you how to protect yourself against inflation with an investment.

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Inflation explained simply

Prices fluctuate, which is normal. However, when many goods and services become more expensive, this is known as inflation. Simply put, inflation means that prices are generally rising, and you can afford less for the same amount of money. As a result, your money loses value, and your purchasing power decreases.

You notice inflation in your everyday life: food is becoming more expensive, electricity prices are rising and rent is increasing. Think of a cup of coffee, for example, 10 years ago, a café crème only cost CHF 4.16 on average – today the average price is CHF 4.58. That’s an increase of 11%. That’s 11 % more.

Inflation in Switzerland

The Federal Statistical Office measures inflation in Switzerland using the Swiss consumer price index (CPI). The calculation is based on a basket of goods that is updated annually, taking into account the goods and services on which the Swiss have spent the most money.

In 2024, the average annual inflation rate was 1.1 % in Switzerland. For example, a purchase that costs CHF 101.10 today only cost CHF 100 last year.

It’s important to know that the Swiss National Bank (SNB) is responsible for maintaining price stability in Switzerland. Price stability is considered guaranteed if the Swiss consumer price index (CPI) increases by no more than 2 % in a given year. To address inflation, the SNB can modify its monetary policy, such as by raising the key interest rate or influencing the exchange rate.

The impact of inflation on your savings

Inflation impacts the savings you have in your account. It causes your savings to gradually lose value over time. While your account balance may display the same amount as it did a few years ago, inflation means that you can purchase fewer goods and services with that money.

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What causes inflation?

There are several causes of inflation, which often interact. Inflation can be caused by

• High demand and short supply: If many people buy more at the same time, demand increases. If suppliers cannot supply enough goods, they react with higher prices.
• Higher costs: When raw materials or wages become more expensive, companies pass these additional costs on to customers. One example of this is the rising cost of electricity for private households due to higher energy prices.
• More money in circulation: If the SNB injects a lot of money into the economy without the economy growing, this can also drive up prices.

There are other causes for a rise in prices. However, inflation is most frequently caused by increased demand and higher production costs.

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The spectre of deflation

A bit of inflation can benefit the economy. If you can purchase something for less next year with the same amount of money, it creates an incentive to buy it now. This stimulates economic activity.

The Swiss National Bank (SNB) is determined to prevent deflation at all costs. Deflation occurs when prices decline, which can harm the economy. When people expect to get more for their money in the future, they tend to save more and spend less. This shift in behavior can trigger an economic downward spiral.

If the interest rate falls below zero, the SNB may reduce the SNB policy rate. The aim is to promote increased consumption and investment; however, this will penalize savers.

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Investing with inflation: how to protect your money

You can safeguard your assets against the impact of inflation by investing in tangible assets. Unlike monetary assets, tangible assets have the ability to retain their value and even appreciate during inflationary periods. To understand why this is the case, let’s take a moment to examine the facts.

Why do tangible assets protect against inflation better than monetary assets?

Tangible assets are physical items that possess material value. When you invest in tangible assets, you own a portion or all of them.

In simple terms, monetary assets represent promises on paper. With monetary securities, you lend your money to debtors like banks or the government through interest-bearing debt instruments. In return, you receive a fixed rate of interest.

Why do tangible assets offer better protection against inflation than monetary assets? Tangible assets have intrinsic value. A house remains a house, even if money loses its value. In contrast, companies can adjust the prices of shares to account for inflation. The companies then earn more. In contrast to a bond with a fixed interest rate, you can expect a higher dividend with shares.

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The solution: invest money in shares

Even beginners can invest money professionally. The simplest option is to use an wealth management service such as finpension. It is crucial to diversify your investments across various types and sectors. This strategy offers better protection than if you concentrate all your resources in one place.

You can invest in stocks or low-cost ETFs, for example. Alternatively, you can invest in real estate or commodities. This is because investments typically generate a higher return than a savings account and can effectively counteract inflation.