Switzerland’s Consumer Price Index (CPI) for May 2025 fell by 0.1% compared to last year, which matches what experts predicted. This is the first time since March 2021 that inflation has turned negative, as reported by the Federal Statistics Office. Core CPI, which leaves out volatile items like food and energy, increased by 0.5% year-on-year, down slightly from 0.6% before. These latest numbers suggest that deflationary pressures are returning, making things tricky for the Swiss National Bank as the Swiss franc becomes stronger.

The Economic Setting

The latest data clearly shows a significant trend. Prices in Switzerland are decreasing, though not by a large amount. This means that prices today are slightly lower than they were last year. While we expected this decline, its arrival changes how we understand the current economic landscape—especially since it’s the first time in four years we’ve seen negative inflation. While the drop isn’t alarming yet, it needs our attention. When we look more closely and exclude items like food and energy, we find that inflation is still above zero. This means there are still some upward price pressures, even if they are easing a bit. It isn’t urgent, but it hints that price softness is affecting more areas of the economy. Jordan and his team now have fewer options to work with. The strong currency is making imported goods cheaper, which lowers consumer prices. However, a stronger franc can also hurt export competitiveness, creating a tension we’ve seen during past tightening cycles. This reflects the delicate balance monetary authorities have to maintain.

Implications for Monetary Policy

For those impacted by interest rate changes and related volatility, it’s time to rethink strategies. The chance of further policy easing looks a little higher than it did a month ago. This isn’t due to a collapse in growth, but because the falling rates of both general and core inflation offer more flexibility. In the near term, we should pay close attention to yields on short-end instruments. These are sensitive to signals from central banks, and under the current circumstances, they might start indicating expectations for a softer rate strategy. We might see a rise in carry trades, especially those focused on stability rather than high-risk opportunities. This situation may also affect broader European macro positions. Changes in Switzerland’s curve could impact neighboring countries’ bond spreads. We’ve observed a stronger correlation when monetary policies diverge. Timing is the real challenge now. Predicting future prices requires more than just looking at past trends—it needs analysis based on actual price behaviors. For the moment, when implied ranges contract and realized volatility remains low, there’s usually an opportunity to trade by betting against extreme outcomes. This is a time when certainty can lead to complacency. We need to stay alert. Keep an eye on the data calendar, especially on monthly reports that can shape real-time rate expectations. And, remember to consider the broader effects of foreign exchange changes. Create your live VT Markets account and start trading now.

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