THE TAKEAWAY: Swiss CPI drops 0.5% in July, less than expected -> Continued deflation threatens Swiss growth -> The Franc gains against the US Dollar
Swiss consumer prices fell by the sharpest monthly rate in over a year as annual inflation remained negative for the tenth straight month. The consumer price index was reported 0.5% lower than the previous month and 0.7% lower than July 2011, both measures were 0.1% higher than expected.
The prices of food and beverages were unchanged in July, while clothing and shoe prices fell 9%. Transport prices were down 0.4% over the month, according to the Federal Statistics Office.
Deflation is compounded by the stregnthening of the Swiss Franc against the neighboring Euro and the resulting lower cost of imported goods. Deflation could negatively impact growth if consumers think their money will have stronger purchasing power in the future. To keep Swiss exports reasonably priced, the Swiss National Bank has maintained a 1.2000 floor in EURCHF trading. Continued deflation allows the SNB to keep on buying foreign currencies without worrying about the effect of inflation.
The Franc gained against the US Dollar following less than expected deflation; USDCHF dropped below 0.9700 after the release. The pair has corrected lower over the past few weeks, reversing a month-long rally that nearly brought USDCHF to parity. Support might come in at 0.9658, by the 50% retracement of July’s rally.
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