The cost of living in Switzerland is getting even higher: How do we deal with it?

Since 2022, inflation and rising prices have put a strain on many people in Switzerland and are prompting changes in consumer behaviour that are likely to continue. This is apparent from a consumer survey commissioned by Deloitte. Regarding policy-driven prices such as rents or health insurance premiums, approval among respondents is fairly evenly split between quick fixes and structural solutions. Nevertheless, there remain significant risks that underlying cost problems will not be resolved and that populist measures will make Switzerland less attractive and competitive.

Although Switzerland is a long way from the sea, it is sometimes referred to as an “island of bliss”. And rightly so.¹  For instance, Switzerland is doubly fortunate in terms of purchasing power. On average, people in our country can afford much more on average than those in neighbouring countries, as they have nearly EUR 50,000²  per year per resident at their disposal, compared with just over half this amount in Austria or Germany. In addition, purchasing power has been hit much less by the eroding effect of inflation here in Switzerland in recent years. General prices in Germany increased by around 17 per cent between December 2020 and the end of 2023, compared with 6 per cent in Switzerland. During the same period, food prices rose even more sharply in some countries, such as Germany (31 per cent), the UK (40 per cent) and Estonia (43 per cent); in Switzerland, the figure was 6 per cent again.³ From February 2023 onwards (3.4 per cent), the year-on-year monthly inflation rate fell throughout last year to 1.4 per cent in November and 1.7 per cent in December. However, as the slight monthly increase in the figures for December suggests, inflation is still there.

The fact that other people have to dig even deeper into their pockets is small comfort when you suddenly have to pay more yourself. A survey of 1,900 Swiss consumers commissioned by Deloitte shows that inflation impacted many people and led to changes in behaviour that are likely to continue, at least in part.

Twenty-seven per cent of respondents said that inflation was a major burden for them in the past 12 months, while a further 38 per cent saw it as a medium burden. The figures are slightly higher for French-speaking Switzerland, where inflation represented a high and medium burden for 33 per cent and 40 per cent respectively.

As shown in Figure 1, this impact resulted in behavioural changes in two areas. First, non-essential spending was reduced. For instance, 52 per cent stated that they were eating out and going out less. Over 40 per cent stated that they were reducing leisure activities or purchases of furniture, household items or clothing respectively. Forty one per cent have also cut back on holidays. Secondly, people have attempted to save on larger expenses, particularly food (34 per cent). Food is a regular and essential expense that accounts for around 8 per cent of the average household budget, according to figures from the Swiss Federal Statistical Office. Those who manage to cut back here are making regular savings.

These behavioural changes are confirmed in Figure 2, which also relates to questions about planned changes made to maintain them. At the top of the list, with 57 per cent, is reducing spending on non-essential items, followed by taking advantage of promotions or switching to cheaper products.

If the decline in inflation were to become more widespread, price pressure would increase less, thereby reducing the urgency for austerity measures. However, previous price increases are not always reversed; a certain loss of purchasing power remains until it is offset by real wage increases. Therefore, at least some consumers are likely to keep their measures in place. Others may have got into the habit: why pay more when you can get by with less, regardless of how much price pressure increases?

The popularity of discounts, promotions and cheaper alternative products shows how worthwhile they can be not only from a consumer perspective, but also for companies if they fit the respective branding and the general pricing strategy. These latter are implemented in a variety of forms, including promotions like Black Friday, more generous discounts for members of the company’s customer loyalty scheme or the launch of such schemes.

The largest and most high-profile price drivers include policy-driven prices, administered prices, such as subsidies (primarily in agriculture), regulatory (patent) protection for pharmaceutical products, and customs duties. Rents and health insurance premiums are very important. There is growing political pressure to take action here. However, both areas are highly complex and there are no easy solutions. To make matters worse, with both health insurance premiums and residential rents, there is a risk of quick fixes and ill-conceived measures that would make the situation even worse. One good example of this is the rent control that has been or is to be applied in various forms in cities, including Berlin. It is a seemingly simple solution: rent increases are strictly limited. However, the consequences are mostly negative. Rental price restrictions, or caps, lead to a shortage of supply and, overall, an increased housing shortage in general⁴, not just in Berlin⁵.

However, as the survey results in Figure 3 show, a rent cap is the least popular solution to rising rents among the respondents. This raises hope that more effective solutions to the growing shortage of housing can be found in Switzerland. For instance, urban densification, a measure to boost supply by creating more housing, ranks second-highest in terms of approval, with 42 per cent. Further measures to boost supply, such as increased funding for the construction of residential properties, social or cooperative housing, are also heading in this direction. These measures also create more housing, but only for specific groups (developers, more socially disadvantaged households, cooperative members), and at the expense of the general public, who finance the funding. Greater support for home ownership is most popular among respondents living in rural areas (42 per cent compared with 38 per cent overall), who are also slightly more likely to have an opinion on the issue (59 per cent compared with 53 per cent). Overall, the survey shows that many people have no opinion on an issue that affects many people personally (at the end of 2021, 61 per cent of all Swiss households lived in rented accommodation, according to the Swiss Federal Statistical Office).

Capping rent increases even when the benchmark rate rises receives a relatively high level of support (31 per cent). The Federal Council recently announced a review of the current rental price model and presented a series of mitigation measures that can be implemented in the short term. So the Federal Council is responding – the only questions are how balanced and effective the proposed measures are and how quickly they can be implemented. These came under pressure from various sides as soon as they were published.⁶

Similar observations can be made regarding the second set of policy-driven prices assessed in the survey: health insurance premiums (see Figure 4). These are very much in the spotlight in the autumn, when the prices for the coming year are announced. Here too, people are directly affected, there are no easy solutions and around 50 per cent say that they have no opinion.

As with the questions about the measures to counter rising rents, when it comes to health insurance premiums, approval is fairly evenly split between treating the symptoms and effective solutions. For instance, the measure with the highest approval rate – extending the reduction of premiums – can be categorised as a largely ineffective solution from a system perspective. It is preferable if people on low incomes are not overburdened by their health care costs. That is a key purpose of health insurance. Yet cost redistribution does not solve the fundamental problem of excessively high and rising costs. It would be better to get the costs under control.

However, more effective solutions such as greater digitalisation of the health care sector also have quite high approval ratings. Higher cost sharing by patients or a restriction on the renumeration of service providers are also met with fairly high levels of support. By contrast, restricting benefits is highly unpopular. Increasing the tax deductibility of health insurance premiums rates received the least support (2 per cent).

Purchasing power and the eroding effect of inflation are major issues that literally affect the money in people’s pockets. Accordingly, people in Switzerland are sensitive to rising prices, as our survey shows. This applies to consumer prices just as much as to rises in policy-driven prices such as rents and health insurance premiums. The latter are currently in the spotlight, and there is growing political pressure to act. But not all solutions are good ones: there is a significant risk of quick fixes.

The Swiss electorate will soon have their say on these and other economically important issues, starting with votes on two opposing pension initiatives in March 2024. They are contrasting in terms of intergenerational equity: whereas one initiative aims to ease the burden on younger generations, the second would lead to even higher contributions. Ageing of the population will result in a greater burden on younger generations anyway, while many of today’s pensioners are financially very well off⁷. Instead of an expensive nationwide increase in pensions, the targeted fight against poverty in old age would be systemically better – and fairer.

These and other decisions will show whether Switzerland has met the dual challenge of finding genuine solutions to its pressing economic problems (e.g. rising costs of living and health care) and of designing the solutions in a way that maintains Switzerland’s competitiveness.

If Switzerland is to remain an island of bliss, this will not happen naturally but will take hard work. Should the underlying foundations, namely the competitiveness of the Swiss economy, be eroded, there is a risk of slipping into the surrounding sea of mediocrity. If we lose our lead, there is much more at stake than rising rents or insurance premiums. The risk here would be a widespread loss of prosperity.