Switzerland’s Consumer Price Index (CPI) for May 2025 registered a decrease of 0.1% year-on-year, aligning with expectations. This marks the first negative headline inflation rate since March 2021, according to the Federal Statistics Office.

Core CPI, which excludes volatile items, rose by 0.5% year-on-year, slightly below the prior rate of 0.6%. The latest figures indicate that deflationary pressures have returned, challenging the Swiss National Bank as the Swiss franc strengthens.

The Economic Setting

This most recent data paints a very clear picture. Overall price levels in Switzerland have started to edge downwards—not dramatically, but enough to matter. The headline figure tells us prices have slipped compared to a year ago, ever so slightly. While this decline was widely anticipated, its actual arrival still alters how we should frame the economic setting. Especially when it’s the first appearance of negative inflation in four years. The path back into negative territory isn’t necessarily alarming just yet, but it demands attention.

On a more refined level, when stripping out categories like food and energy, inflation is still above zero. This implies that some momentum in underlying price pressures continues beneath the surface. That said, this rate also eased marginally. It doesn’t scream urgency, but it suggests that softness in pricing is gradually touching broader segments of the economy.

Jordan and his colleagues now face a narrower corridor of action. The currency has gained ground, which decreases the cost of imported goods, leading to lower prices at the consumer level. But a strong franc also risks further dampening export competitiveness, a tension we’ve watched unfold in past tightening cycles. From our side, it speaks to the fine line monetary authorities are treading.

Implications for Monetary Policy

For those whose exposures hinge on rate outcomes and implied volatility, there’s a need to reassess. The probability of additional policy easing now appears slightly higher than even a month ago. Not because growth prospects have collapsed, but because the descending trajectory in both headline and underlying inflation allows more room to manoeuvre.

Near-term, we should be eyeing yields on short-end instruments very carefully. They’re always sensitive to signals from central desks, but under these conditions they may begin to reflect expectations for a gentler rate path. Carry trades may increase in popularity again, especially those leaning on stability rather than risk appetite.

There’s also the directional influence this may have on broader European macro positions. Swings in the Swiss curve could spill over, especially into neighbouring sovereign spreads. We’ve seen this correlation tighten when the differences in monetary direction widen.

Timing remains the real challenge. Pricing forward curves now requires more than just extrapolating the past—it needs scenario analysis anchored in real price behaviour. For now, when implied ranges tighten and realised vol stays muted, there’s typically a trade somewhere in fading the tails.

This is one of those periods where certainty can turn into complacency. We need to remain responsive. Watch the data calendar closely—particularly monthly prints that influence real-time rate assumptions. And above all, factor in the broader FX drag.

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