Swiss Consumer Prices Decline Most in Two Years on Franc Strength: Economy

Swiss consumer prices dropped the most in more than two years in January as the franc’s ascent lowered the cost of imported goods.

Consumer prices declined 0.8 percent from a year ago after falling 0.7 percent in December, the Federal Statistics Office in Neuchatel said in an e-mailed statement today. That’s the fourth straight drop and the biggest decrease since October 2009. On the month, prices fell 0.4 percent.

The Swiss National Bank (SNBN) imposed a currency cap of 1.20 versus the euro in September after the franc reached near-parity with the single currency. While the franc has since weakened, acting Chairman Thomas Jordan said on Feb. 7 policy makers “stand ready to take further measures if the economic outlook and the risk of deflation so require.”

“The decline is mainly induced by the franc’s strength,” said Alessandro Bee, an economist at Bank Sarasin in Zurich. “The economy as a whole is doing too well for the country to slip into a deflationary scenario. I don’t expect the SNB to raise its franc limit in the foreseeable future.”

The franc, considered a haven in times of turmoil, was trading at 1.2095 against the euro as of 12:18 p.m in Zurich, from 1.2114 yesterday. Against the dollar, it was at 91.25 centimes.

Swatch Earnings

The Swiss currency’s ascent of 9 percent over the past year is weighing on export demand and adding pressure on companies to lower costs just as euro-region growth falters. In France, the area’s second-largest economy, industrial output dropped 1.4 percent from the previous month, statistics office Insee in Paris said today. Italy’s manufacturing production slumped 7.7 percent in December from a year earlier.

Swatch Group AG (UHR), the largest maker of Swiss watches, on reported full-year net income on Feb. 7 that missed analysts’ estimates. The franc’s strength, which cuts the value of sales generated in dollars and euros, cut revenue by about 700 million francs ($767 million), it said.

The cost of Swiss imported consumer goods dropped 1.8 percent in December from the previous month and were down 3.2 percent compared with a year earlier, today’s report showed. Prices for domestic goods rose 0.1 percent on the month and the year, respectively.

In the U.K., producer-price inflation slowed to 4.1 percent last month, the weakest since November 2010, from 4.8 percent in December, the Office for National Statistics in London said today. The Bank of England, which yesterday pledged to pump an extra 50 billion pounds ($79 billion) into the economy, expects consumer-price inflation to fall below its 2 percent target by the end of 2012.

‘Risk Scenario’

Jordan said earlier this week that the franc remains “very strong” and that policy makers “will not tolerate any trading below the minimum rate” of 1.20 versus the euro. There’s currently “absolutely no risk of inflation,” he said.

“If the risk scenario of a further escalation of the debt crisis were to materialize, economic activity in Switzerland would suffer a much more pronounced slowdown,” Jordan said. “Such a development would lead to a severe risk of deflation.”

European stocks dropped today and the euro weakened against the dollar after euro-region finance ministers held back a rescue package for Greece at a meeting in Brussels. The Stoxx Europe 600 Index fell 0.4 percent.

Greece must pass its latest austerity package into law and identify 325 million euros ($430 million) in spending cuts before euro-area governments endorse a second bailout plan, Luxembourg Prime Minister Jean-Claude Juncker said. Greek lawmakers are set to convene this weekend to begin voting.

U.S. Confidence

In the U.S., economists forecast a reading of 74.8 on the Thomson Reuters/University of Michigan preliminary index of consumer sentiment, which is little changed from a reading of 75 at the end of January, the highest level in almost a year. The trade deficit in the U.S. probably widened to $48.5 billion from the $47.8 billion shortfall in November, according to a separate survey. Both reports will be published later today.

In Asia, China’s exports fell and imports slid more than forecast in January, the first declines in two years, as a weeklong holiday disrupted trade and commodity prices dropped.

Overseas shipments decreased 0.5 percent and imports fell 15.3 percent from a year earlier, the customs bureau said. The median estimate of 30 economists was for a 3.6 percent drop in imports for the month, which had four fewer working days than January 2011. The trade surplus widened to a six-month high of $27.3 billion. Trade data in the first two months of the year are distorted by the timing of the Chinese New Year festival, which took place in January this year.

Elsewhere in the Asia-Pacific region, the Australian central bank lowered its forecasts for growth and inflation this year. The outlook for consumer prices provides “scope for easier monetary policy should demand conditions weaken materially,” the Reserve Bank of Australia said.

To contact the reporters on this story: Klaus Wille in Zurich at kwille@bloomberg.net; Simone Meier in Zurich at smeier@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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