Swiss supply prices drop highlights deflation risk.

Swiss National Bank has been fighting deflation with all the power at its disposal and yet all it gets is more CPI deflation. May be they should just give up and let the prices adjust. The sooner it happens, the sooner economic growth can restart. Deflation is natural and must happen. Until it does, the recession will go on.

Interactive Investor site, Reuters feed. July 13, 2009.

Swiss supply prices drop highlights deflation risk.

ZURICH, July 13 (Reuters) – Swiss supply prices posted their steepest decline in 23 years in June, highlighting once again the risk of a deflationary spiral of falling prices and declining demand in the Alpine economy.
The steep price drop will also keep the Swiss National Bank on its toes in its fight against deflation, which include interventions to stem a rise in the Swiss franc, economists said.
The combined producer and import index fell by 5.6 percent compared to June 2008, the Federal Statistics Office said on Monday, posting the sharpest drop since November 1986.
Economists had expected the combined index to drop by 5.4 percent on the year.
But prices were flat compared to May. Producer prices fell 3.4 percent from a year ago, while import prices slumped 9.6 percent.
The drop in producer prices was the steepest since at least 1964, the earliest year-on-year change available, a spokesman for the office said.
The SNB has taken a number of drastic steps to fight the risk of deflation as the country faces the deepest recession in over 30 years.
The central bank cut interest rates close to zero, intervened to fight a rise in the Swiss franc and bought corporate bonds to keep credit spreads down.
But figures released earlier this month showed consumer prices posted their sharpest decline in 50 years in June with a 1 percent drop from a year ago.

“A deflation is not our main scenario but the risks clearly exist,” said Credit Suisse Fabian Heller. “The central bank will continue with its expansionary monetary policy until the outlook changes fundamentally.”
Many economists expect that the strong base effect from last year’s record high oil prices will level off in the second half of the year though weak demand will keep a lid on companies’ pricing power.
Import prices for refined oil products were down 44 percent on the year, metal products were 27 percent cheaper.
Core inflation stripping out volatile components such as commodities showed a 2.5 percent decline for import prices. Producer price core inflation was flat on the year.
“We see a slight fall in consumer prices in 2009 overall but prices are set to rise again in 2010,” ZKB analyst Cornelia Luchsinger said. “We would not speak of a pronounced deflationary tendency.”


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