SWGAY Swatch Group AG (PK)

ZURICH—Consumer prices in Switzerland edged lower in September, driven by weaker prices of imported goods, marking nearly two years of continuous price declines.

But the declines have moderated in recent months after much steeper drops last year, and consumer prices have essentially been flat since the summer and are widely expect to return to positive territory, albeit barely, later this year and into 2016.

The development underscores the challenges, and benefits, that weak prices have brought to the small, wealthy Alpine economy. Price-sensitive sectors such as tourism and luxury goods have taken a hit in recent months, but Switzerland as a whole has weathered some of deflation's more damaging effects with economic activity accelerating in the spring.

In short Switzerland offers fodder for those on both sides of the deflation debate: those who see it as a threat to activity that must be avoided at all costs and others who view it as an economic detox of sorts that flushes inefficiencies out of the system.

"This whole deflation debate is overestimated. Switzerland's experience is that a temporary decrease in prices which is not extreme—not 5-10%, but somewhere around zero—does not harm the economy," said Rudolf Minsch, chief economist at Economiesuisse, which represents more than 100,000 Swiss businesses.

Swiss consumer prices fell 0.2% last month compared with September 2015, according to data from the federal statistics office, the 23rd-straight month that prices have fallen on a year-over-year basis.

Consumer prices have been mostly falling for the last five years. The Swiss franc strengthened in 2011 amid concerns over Europe's debt crisis, making prices of imported goods and services cheaper.

Deflation deepened in mid-2015 with prices falling nearly 1.5% annually. This came in the wake of the SNB's surprising decision in January 2015 to abandon a cap on the franc's value against the euro that it had maintained for more than three years, leading to a sharp spike in the franc's value.

But deflation has receded since with prices now barely falling. Economists expect inflation to turn positive again later in the year but to remain weak over the next two years. The Swiss National Bank said last month that it expects inflation to average 0.2% in 2017 and 0.6% in 2018. The forecasts were slightly lower than in June.

The SNB has more leeway than other central banks in tolerating ultralow inflation. Its objective is for inflation rates between zero and 2%. In contrast, the Federal Reserve, European Central Bank, Bank of Japan and others aim for inflation right around 2%.

The SNB has one of the deepest negative deposit rates in the world and a large balance sheet, but it hasn't taken any major easing steps since its last rate cut in January 2015.

The concern about falling prices is that they may convince consumers to delay spending on the assumption that they will get better deals if they wait. That hurts spending, and may force businesses to delay investment and hiring. Japan has struggled with the effects of deflation for most of the past two decades.

But in Switzerland's case, its export-dependent economy has weathered some of these effects. The trade surplus remains high despite the strong franc. Gross domestic product grew 2% on an annual basis in the second quarter, exceeding economist forecasts.

But the strong franc has battered some sectors. Overnight hotel stays in Switzerland fell 1% in August from the previous year, led by a 2.8% drop by foreign visitors, the statistics office said Thursday. The country's luxury watch industry has been hit by a pair of profit warnings in recent months by marquee brands Swatch Group and Cie. Cie. Financiè re Richemont SA, the maker of Cartier jewelry and watches.

Swiss retail sales have fallen on an annual basis since January 2015, an indication that an increase in disposable incomes brought on by weaker prices hasn't spurred much new consumption.

"So far I would say deflation was not massive, but overall the negatives outweigh the positives," said Daniel Kaufmann, an economist at the KOF Swiss Economic Institute.

Write to Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

October 06, 2016 07:35 ET (11:35 GMT)

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