Category: Economics for Business: Ch 14

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Rival bids for Warner Bros. face competition scrutiny

The television streaming market is currently attracting considerable attention from policy makers. This follows Warner Bros. accepting Netflix’s offer to buy part of the company for $72bn. To understand how this deal came about and why there is policy concern, we need to go back a few years.

The media and entertainment conglomerate Warner Bros. Discovery (WBD) was created in 2022 when AT&T sold Warner Bros to Discovery.1 However, in June 2025 the company announced that it would split the business into two parts. One would be (a) the studio for TV and movie production, where for example the Harry Potter franchises were made, and (b) the TV streaming business, home to for example the hit TV series Succession. The other, the more traditional and declining TV networks, including channels such as CNN, Discovery and TNT Sports, would form a new company called Discovery Global. David Zaslav, WBD President and Chief Executive stated that:

We are empowering these iconic brands with the sharper focus and strategic flexibility they need to compete most effectively in today’s evolving media landscape.2

Shortly afterwards, rival media and entertainment conglomerate, Paramount Skydance, made a series of bids to purchase the entire WBD business. But these were rejected by the WBD board. Despite this, in October 2025 WBD made public that it was open to a sale and had received unsolicited interest from several companies. It was believed that this included offers from Comcast and Netflix.

Recent developments

In December 2025, Netflix announced that it had agreed a deal with WBD to buy its studio and streaming service business, including its back catalogue of shows. The deal is planned to be put to WBD shareholders in the next few months.3 Netflix has over 300m subscribers across the globe and streams popular shows, such as Stranger Things and Squid Games.

Despite this accepted offer, Paramount has subsequently pursued a hostile takeover of WBD by going straight to its shareholders. In addition, Paramount launched a lawsuit to get further information on how Netflix was chosen as the buyer and to provide WBD shareholders with information on the value of the TV network business that WBD was selling. This, however, was quickly thrown out of the courts.

Over time, Netflix and Paramount have tinkered with their bids to make them more attractive to WBD. Whilst Paramount’s bid was all cash, originally Netflix was offering a mixture of cash and shares. However, in January, it switched this to an all-cash offer. In February, Paramount made clear that if WBD instead accepted its offer, it would pay the $2.8bn termination fee that would be owed to Netflix.4 Furthermore, from early 2027 Paramount would pay WBD shareholders payments of $650m per quarter, known as ticking fees, if combining WBD and Paramount faced regulatory delay.

In mid-February 2026, it emerged that, following a waiver from Netflix, WBD had reopened talks with Paramount. Paramount was given a week to make its offer. Then, under the agreed deal, Netflix would have the right to adjust its bid. This is an attempt by WBD to end the hostile bidding war Paramount is pursuing and to provide clarity for its shareholders. WBD has reiterated that it will:

continue to recommend and remain fully committed to our transaction with Netflix. [However], we welcome the opportunity to engage with you and expeditiously determine whether Paramount Skydance can deliver an actionable, binding proposal that provides superior value.5

The insertion of the ticking fees by Paramount is in response to the substantial attention competition authorities across the globe are paying to the acquisition of WBD. The deal is being investigated by the US Department of Justice and, in early February, Netflix was questioned by the US Senate Antitrust Sub-committee. During this hearing, one of the Senators expressed his anger with the country’s competition laws and raised concerns that the deal would result in Netflix getting:

more power over consumers and leaving fewer alternatives and streaming platforms.6

While Paramount did not attend this hearing, it is believed that it has raised concerns about the Netflix-WBD deal to regulators. Netflix co-CEO, Ted Sarandos, has also met with Donald Trump to discuss the deal. However, Trump subsequently stated that the deal ‘could be a problem’.7

The EU and UK markets

Furthermore, whilst all the companies involved are American, both the mergers with Netflix and Paramount are being investigated by the European Commission as markets in Europe would be affected.

In the UK, a group of politicians and former policymakers, have written to the Competition and Markets Authority urging it to conduct a full investigation of the Netflix-WBD merger. The letter argues that the merger could have:

damaging consequences for consumers, the UK’s world-leading creative industries and the UK cinema industry.

and that:

At a time when the British consumer can ill-afford more price increases, Netflix would possess an unprecedented ability to raise prices to access television and films.8

The letter comes at a time when pressure is being placed on the CMA to adopt a generally more business-friendly approach.

The impact of the merger on the UK market is particularly complicated since Warner Bros.’ streaming service, HBO Max, is only due to launch in the UK in March 2026. This is still the plan, with WBD’s head of global streaming, Jean-Briac Perette acknowledging that:

We are likely the last scaled global streamer to come to market. We’ve tried to learn from the rest. We’re a complementary and distinct service to the more volume-driven or basic cable-like streamers in the market. More is not better. Better is better.9

An alternative route to regulatory approval

An easier route to regulatory approval may well be instrumental in allowing Netflix or Paramount to win the battle for WBD. Netflix stresses that the deal will create economic growth and jobs. Netflix’s Sarandos highlighted that:

This is not a typical media merger where you end up with what’s called the Noah’s Ark problem — two of everything. We are buying a company that has assets that we do not, and we will keep investing in those.10

The problem of economic power

In contrast, critics argue that either of the deals would create a new company with too much power. However, given the nature of the firms involved, the competition issues will be fundamentally different between the two deals.

The Paramount deal would primarily reduce the number of studios in the market. This could provide the new merged studio with more bargaining power over distributors, advertisers and creators. Ultimately, this could negatively impact on the final product that consumers watch in the cinema and on television.

The Netflix deal on the other hand would impact directly on the streaming market. In the USA, 80% of consumers have both Netflix and HBO Max.11 After the merger, consumers would have less choice of competing services and Netflix-HBO Max combined may well have an incentive to raise its subscription prices.

In the UK, there are currently three leading streaming services: Netflix, Amazon Prime and Disney+, each with around 23% of the market.12 The merger with WBD could allow Netflix to become the clear market leader.

Concerns about YouTube

When examining streaming markets in all countries, an important factor will be whether to include YouTube in the market. Netflix certainly argues that it is a key competitor, at the hearing Sarandos stated that:

we are competing for the same content, we are competing for the same viewers, we are competing often for the same ad dollars. YouTube is not just cat videos anymore. YouTube is TV.13

If YouTube is included, in the USA it would be the market leader with 13%, ahead of Netflix on 9%. However, the competition authorities may conclude that YouTube’s product and business model is sufficiently different and so not include it in the streaming market.14

The issue of cinemas

A second concern in the Netflix deal will be the Warner Bros.’ studio content that Netflix would own. The merged business may have an incentive to discontinue, raise the price or reduce the quality of the studio output that it supplies to cinemas. Thus, the competition authorities’ investigations will also pay close attention to the impact on the cinema market.

In line with these arguments, the Hollywood screenwriters’ union, the Writers Guild of America, has indicated that the Netflix-WMD deal should be stopped and filmmakers are clearly concerned about Netflix prioritising streaming.15
 
 
The competition authorities may well consider imposing remedies before they are willing to allow either deal to go ahead. With this in mind, it is interesting that Netflix has already made clear that it will continue the 45-day exclusive window that Warner Bros. provides cinemas to show its films.

It will be fascinating to see how the competing bids play out and how the competition regulators view them.

References

  1. AT&T agrees deal to combine WarnerMedia with Discovery

    2. The Guardian, Mark Sweney (16/5/21)

  2. HBO and CNN owner to split streaming and cable businesses

    3. BBC News, Adam Hancock (10/6/25)

  3. Netflix’s co-CEO went to an antitrust hearing and a culture war broke out

    4. NBC News, Saba Hamedy (3/2/26)

  4. Warner Bros gives Paramount seven days to make ‘best and final’ offer

    5. The Guardian, Mark Sweney (17/2/26)

  5. ibid.

  6. NBC News, op. cit.

  7. Trump says $72bn Netflix-Warner Bros deal ‘could be a problem’

    8. BBC News, Osmond Chia (8/12/25)

  8. UK politicians call for competition review of Netflix bid for Warner Bros

    9. Financial Times (26/1/26)

  9. Warner streaming boss defends HBO Max UK launch ahead of Netflix takeover

    10. Financial Times (9/2/26)

  10. NBC News, op. cit.

  11. Netflix and Warner Bros struggle to defend merger

    12. BBC News, Danielle Kaye (3/2/26)

  12. Netflix, Disney+, Prime: Streaming platform market share report UK 2025
    InsiderMedia, Jennifer O’Keeffe (2/12/25)

  13. BBC News, Danielle Kaye op. cit.

  14. Paramount sweetens Warner Bros bid with offer to pay Netflix break-up cost, other fees

    15. Reuters, Harshita Mary Varghese and Aditya Soni (11/2/26)

  15. In a takeover of Warner Bros., Netflix makes a play for 21st century Hollywood’s throne

    16. NBC News, Daniel Arkin (5/12/25)

Articles

Questions

  1. What are the similarities and differences between Netflix’ and YouTube’s business models? How close substitutes do you think they are?
  2. Do you think cinemas are a closer or more distant substitute to Netflix than YouTube?
  3. Which deal do you think raises the most competition concerns? What might be a possible remedy that could alleviate these concerns?
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Shrinkflation, skimpflation and sneakflation: ways of hiding inflation

Have you noticed that many products in the supermarket seem to be getting smaller or are poorer quality, or that special offers are not as special as they used to be? When you ring customer services, does it seem that you have to wait longer than you used to? Do you now have to pay for extras that used to be free? These are all ways that producers try to pass on cost increases to consumers without rising prices. There are three broad ways in which producers try to hide inflation.

The first is called ‘shrinkflation’. It is defined as having less product in the same package or a smaller package for the same price. For example, reducing the number of chocolates in a tub, reducing the size of a can of beans, jar of coffee or block of butter, reducing the number of sheets in a toilet roll, or the length of a ride in a fairground or portion sizes in a restaurant or takeaway. A 2023 YouGov poll revealed that 75% of UK adults are either ‘very’ or ‘fairly’ concerned about shrinkflation. A similar poll in 2025 showed that this figure had increased to 80%. The product category with the greatest concerns was snack foods (e.g. crisps, confectionery items, nuts, etc.).1

The second form of hidden inflation is called ‘skimpflation’. This is defined as decreasing the quality of a product or service without lowering the price. Examples include cheaper ingredients in food or confectionery, such as using palm oil instead of butter, or reducing the cocoa content in chocolate or the meat content in sausages and pies, or package holidays reducing the quality of meals, or customer service centres or shops reducing the number of staff so that people have to wait longer on the phone or to be served.

The third is called ‘sneakflation’. This is similar to skimpflation but normally refers to reducing what you get when you pay for a service, such as a flight, by now charging for extras, such as luggage or food. Sometimes shrinkflation or skimpflation are seen as subsets of sneakflation.

These practices have had a lot of publicity in recent months, with consumers complaining that they are getting less for their money. Many people see them as a sneaky way of passing on cost increases without raising the price. But the changes are often subtle and difficult for shoppers to spot when they are buying an item. Skimpflation especially is difficult to observe at the time of purchase. It’s only when people consume the product that they think that it doesn’t seem as good as it used to be. Even shrinkflation can be hard to spot if the package size remains the same but there is less in it, such as fewer biscuits in a tin or fewer crisps in a packet. People would have to check the weight or volume, while also knowing what it used to be.

If firms are legitimately passing on costs and are up-front about what they are doing, then most consumers would probably understand it even if they did not like it. It’s when firms do it sneakily that many consumers get upset. Also, firms may do it to increase profit margins – in other words, by reducing the size or quality beyond what is necessary to cover the cost increase.

Does the official rate of inflation take such practices into account?

The answer is that some of the practices are taken into account – especially shrinkflation. The Office for National Statistics (ONS) accounts for shrinkflation by monitoring price changes per unit of weight or volume, rather than just the price. Data collectors track the weight, volume or count of item. When a product’s size is reduced, the ONS records this as a price increase in CPI or CPIH inflation statistics. This is known as a ‘quality adjustment’ process and allows the ONS to isolate price changes from product size changes. As CPI data from the ONS is used by the Bank of England in monitoring its 2% inflation target, it too is incorporating shrinkflation.

ONS quality adjustments are also applied to non-market public services, such as healthcare, education and policing to measure changes in service quality rather than just volume. This allows a more accurate measurement of productivity as it focuses on outcomes and user experience per pound spent rather than just focusing on costs.

Skimpflation is more difficult to monitor. The quality adjustment process may miss some quality changes and hence some skimpflation goes unrecorded. This means that the headline inflation rate might understate the true decline in purchasing power felt by consumers.

How extensive is hidden inflation?

Despite public perception, shrinkflation has a relatively small impact on the headline CPI and CPIH inflation rate in the UK because it is largely confined to certain sectors, such as bread and cereals, personal care products, meat products, and sugar, jams, syrups, chocolate & confectionery. Nevertheless, in these sectors it is particularly prevalent, especially in the packaged foodstuffs and confectionery sector. The latest research by the ONS in 2019 covered the period June 2015 to June 2017 and is shown in the following figure.2

According to research in the USA by Capital One Shopping, some major brands reduced product sizes by over 30% in 2025 without reducing prices, with shrinkflation averaging 14.8% among selected national grocery brands.3 Shrinkflation had been observed by 74% of Americans at their grocery store. Of these, 81% took some kind of action as a result, with 48% abandoning a brand. Nevertheless, across all products, shrinkflation accounts for quite a small percentage of any overall price rises.

A US Government Accountability Office (GAO) report found that shrinkflation accounted for less than 1/10 of a percentage point of the 34.5% increase in overall consumer prices from 2019 to 2024.4 The reason is that the items that were downsized comprised a small percentage of goods and services. Indeed, many goods and services, such as housing, cannot be downsized in the same way that household products can.

Nevertheless, with consumer budgets being squeezed by the inflation that followed the pandemic and the Russian invasion of Ukraine, hidden inflation has become more prevalent in many countries and an increasing concern of consumers.

References

  1. Shrinkflation concern rises in 2025, but fewer Britons are changing shopping habits

    2. YouGov (15/8/25)

  2. Shrinkflation: How many of our products are getting smaller?

    3. Office for National Statistics (21/1/19)

  3. Shrinkflation Statistics

    4. Capital One Shopping (30/12/25)

  4. What is “Shrinkflation,” And How Has It Affected Grocery Store Items Recently?

    5. U.S. Government Accountability Office (12/8/25)

Videos

Articles

Journal Article

Questions

  1. If shrinkflation, when included in CPI statistics, accounts for such a small percentage of inflation, why are people so concerned about it?
  2. From a company’s perspective, is it a good idea to engage in (a) shrinkflation; (b) skimpflation?
  3. Go round you local supermarket and identify examples of shrinkflation and skimpflation.
  4. How are various EU countries attempting to inform consumers of shrinkflation?
  5. Why is skimpflation often harder to detect than shrinkflation?
  6. Give some other examples of sneakflation in the provision of services.
  7. How could behavioural economists help firms decide whether or how to engage in shrinkflation or skimpflation?
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Age-old problems but new technology: developments in collusion in the algorithmic era

In my previous blog post on this site, I examined how AI-powered pricing tools can act as a ‘double-edged sword’: offering efficiency gains, while also creating opportunities for collusion. I referred to one of the early examples of this, which was the case involving Trod Ltd and GB Eye, where two online poster and frame sellers on Amazon used pricing algorithms to monitor and adjust their prices. However, in this instance there was also an explicit agreement between the firms. As some commentators put it, it was ‘old wine in new bottles‘, meaning a fairly conventional cartel that was simply facilitated through digital tools.

Since then, algorithms have increasingly become part of everyday life and are now embedded in routine business practice.

Some of the effects may have a positive effect on competition. For example, algorithms can help to lower barriers to entry. In some markets, incumbents benefit from long-standing experience, while new firms face significant learning costs and are at a disadvantage. By reducing these learning costs and supporting entry, algorithms could contribute to making collusion harder to sustain.

On the other hand, algorithms could increase the likelihood of collusion. For example, individual algorithms used by competing firms may respond to market conditions in predictable ways, making it easier for firms to collude tacitly over time.

Algorithms can also improve the ability of firms to monitor each other’s prices. This is particularly relevant for multi-product firms. Traditionally, we might expect these markets to be less prone to collusion because co-ordinating across many products is complex. AI can overcome this complexity. In the Sainsbury’s/Asda merger case, for example, the Competition and Markets Authority suggested that the main barrier to reaching and monitoring a pricing agreement was the complexity of pricing across such a wide range of products. However, the CMA also suggested that technological advances could increase its ability to do so in the future.

The ‘hub-and-spoke’ model

One of the other growing concerns is the ability of AI pricing algorithms to facilitate collusion by acting as a ‘hub’ in a ‘hub-and-spoke’ arrangement. In this type of collusion, competing firms (the ‘spokes’) need not communicate directly with one another. Instead, the ‘hub’ helps them to co-ordinate their actions.

While there have been only limited examples of an AI pricing algorithm acting as a hub in practice, what once seemed to be a largely theoretical concern has now become a live enforcement issue.

A very recent example is the RealPage case in the United States. The Department of Justice (DOJ) filed an antitrust lawsuit against RealPage Inc. in August 2024, alleging that RealPage, acting as the ‘hub’, facilitated collusion between landlords (the ‘spokes’).

RealPage provided pricing software to numerous landlords, including the largest landlord in the USA, which manages around 950 000 rental units across the country. These landlords would normally compete independently in setting rental prices, discounts and lease terms to win consumers. However, by feeding competitively sensitive information that would not usually be shared between rivals into RealPage’s system, the software generated pricing recommendations that, according to the DOJ, led to co-ordinated rent increases across competing apartment complexes.

In the RealPage case, the authorities reported that they had access to internal documents and statements from the parties involved, which helped support their allegations. These included references within RealPage to helping landlords ‘avoid the race to the bottom’ and comments from a landlord describing the software as ‘classic price fixing’.

Evidence in these cases really matters because the standard of proof required to establish a hub-and-spoke arrangement is much higher than for traditional cases of explicit collusion. This is because it can be difficult to distinguish between legitimate and anti-competitive communication between retailers and suppliers. Also, proving ‘anti-competitive intent’ is inherently challenging.

Other competition authorities around the world are also turning their attention to these issues. For example, the European Commission recently announced that a number of investigations into algorithmic pricing are underway, signalling a clear shift toward more active scrutiny. As technology continues to advance, it is clear that algorithmic pricing will remain an area where both firms and authorities must move and adapt quickly.

Articles

Questions

  1. In what ways does the RealPage case differ from the earlier Trod Ltd and GB Eye Ltd case? Consider the roles played by the firms, the nature of the alleged co-ordination, and the extent to which pricing algorithms were used to facilitate the conduct.
  2. How might the use of pricing algorithms affect the likelihood of firms colluding, either explicitly or tacitly? Consider ways that algorithms may make collusion easier to sustain but also ways in which they may reduce its likelihood.
  3. Should firms be held liable for anti-competitive outcomes produced by algorithms that ‘self-learn’, even if they did not intend those outcomes? Explain why or why not.
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How to increase productivity – the key to economic growth

The productivity gap between the UK and its main competitors is significant. In 2024, compared to the UK, output per hour worked was 10.0% higher in France, 19.8% higher in Germany and 41.1% higher in the USA. These percentages are in purchasing-power parity terms: in other words, they reflect the purchasing power of the respective currencies – the pound, the euro and the US dollar.

GDP per hour worked (in PPP terms) is normally regarded as the best measure of labour productivity. An alternative measure is GDP per worker, but this does not take into account the length of the working year. Using this measure, the gap with the USA is even higher as workers in the USA work longer hours and have fewer days holiday per year than in the UK.

The productivity gap is not a new phenomenon. It has been substantial and growing over the past 20 years. (The exception was in 2020 during lockdowns when many of the least productive sectors, such as hospitality, were forced to close temporarily.)

The productivity gap is shown in the two figures. Both figures show labour productivity for the UK, France, Germany and the USA from 1995 to 2024.

Figure 1 shows output (GDP) per hour, measured in US dollars in PPP terms.

Figure 2 shows output (GDP) per hour relative to the UK, with the UK set at 100. The gap narrowed somewhat up to the early 2000s, but since then has widened.

Low UK productivity has been a source of concern for UK governments and business for many years. Not only does it constrain the growth in living standards, it also make the UK less attractive as a source of inward investment and less competitive internationally.

Part of the reason for low UK productivity compared to that in other countries is a low level of investment. As a proportion of GDP, the UK has persistently had the lowest, or almost the lowest, level of investment of its major competitors. This is illustrated in Table 1.

It is generally recognised by government, business and economists that if the economy is to be successful, the productivity gap must be closed. But there is no ‘quick fix’. The policies necessary to achieve increased productivity are long term. There is also a recognition that the productivity problem is a multi-faceted one and that to deal with it requires policy initiatives on a broad front: initiatives that encompass institutional changes as well as adjustments in policy.

So what can be done to improve productivity and how can this be achieved at the micro as well as the macro level?

Improving productivity: things that government can do

Encouraging investment. Over the years, UK governments have increased investment allowances, enabling firms to offset the cost of investment against pre-tax profit, thereby reducing their tax liability. For example, in the UK, companies can offset a multiple of research and development costs against corporation tax. The rate of relief for small and medium-sized enterprises (SMEs) allows companies that work in science and technology to deduct an extra 86% of their qualifying expenditure from their trading profit in addition to the normal 100% deduction: i.e. a total of 186% deduction. Meanwhile, since April 2016, larger companies have been able to claim a R&D expenditure credit, initially worth 11 per cent of R&D expenditures, then 12 per cent from 2018 and 13 per cent from 2020. This was then raised to 20 per cent from 2023.

Strengthening competition. A number of studies have revealed that, with increasing market share, business productivity growth slows. As a result, government policy sought to strengthen competition policy. The Competition Act 1998, which came into force in March 2000, and the Enterprise Act of 2002, enhanced the powers of the Office of Fair Trading (OFT) (a predecessor to the Competition and Markets Authority) in respect to dealing with anti-competitive practices. It was given the ability to impose large fines on firms which had been found guilty of exploiting a dominant market position. Today, one of the strategic goals of the Competition and Markets Authority (CMA) is the aim of ‘extending competition frontiers’ in order to improve the way competition works.

Encouraging an enterprise culture. The creation of an enterprise culture is seen as a crucial factor not only to encourage innovation but also to stimulate technological progress. Innovation and technological progress are crucial to sustaining growth and raising living standards. The UK government launched the Small Business Service in April 2000, later renamed Business and Industry. Its role is to co-ordinate small-business policy within government and liaise with business, providing advice and information. However, according to the OECD, there remains considerable scope for increasing the level of government support for entrepreneurship in the UK.

Improving productivity: things that organisations can do

In the podcast from the BBC’s The Bottom Line series, titled ‘Productivity: How Can British Business Work Smarter’ (see link below), Evan Davis and guests discuss what productivity really looks like in practice – from offices and factories, to call centres and operating theatres.’ The episode identifies a number of ways in which labour productivity can be improved. These include:

  • People could work harder;
  • Workers could be better trained and more skilled and thus able to produce more per hour;
  • Capital could be increased so that workers have more equipment or tools to enable them to produce more, or there could be greater automation, releasing labour to work on other tasks;
  • Workplaces could be arranged more efficiently so that less time is spent moving from task to task;
  • Systems could put in place to ensure that tasks are done correctly the first time and that time is not wasted having to repeat them or put them right;
  • Workers could be better incentivised to work efficiently, whether through direct pay or promotion prospects, or by increasing job satisfaction or by management being better attuned to what motivates workers and makes them feel valued;
  • Firms could move to higher-value products, so that workers produce a greater value of output per hour.

The three contributors to the programme discuss various initiatives in their organisations (an electronics manufacturer, NHS foundation trusts and a provider of office services to other organisations).

They also discuss the role that AI plays, or could play, in doing otherwise time-consuming tasks, such as recording and paying invoices and record keeping in offices; writing grants or producing policy documents; analysing X-ray results in hospitals and performing preliminary diagnoses when patients present with various symptoms; recording conversations/consultations and then sorting, summarising and transcribing them; building AI capabilities into machines or robots to enable them to respond to different specifications or circumstances; software development where AI writes the code. Often, there is a shortage of time for workers to do more creative things. AI can help release more time by doing a lot of the mundane tasks or allowing people to do them much quicker.

There are huge possibilities for increasing labour productivity at an organisational level. The successful organisations will be those that can grasp these possibilities – and in many cases they will be incentivised to so so as it will improve their profitability or other outcomes.

Podcast

Articles

Data

Questions

  1. In what different ways can productivity be measured? What is the most appropriate measure for assessing the effect of productivity on (a) GDP and (b) human welfare generally?
  2. Why has the UK had a lower level of labour productivity than France, Germany and the USA for many years? What can UK governments do to help close this gap?
  3. Find out how Japanese labour productivity has compared with that in the UK over the past 30 years and explain your findings.
  4. Research an organisation of your choice to find out ways in which labour productivity could be increased.
  5. Identify various ways in which AI can improve productivity. Will organisations be incentivised to adopt them?
  6. Has Brexit affected UK labour productivity and, if so, how and why?
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Gold: why the world’s oldest safe haven is back in the spotlight

The gold market has become one of the most talked-about commodity markets in 2025, with prices reaching record highs. This is largely due to increased demand from investors, who see gold as a ‘safe haven’ during times of economic and political uncertainty. Central banks are also buying more gold as a way to reduce their reliance on currencies like the US dollar. With many analysts predicting prices could reach over $4000 per ounce in the next year, the gold market is showcasing how supply and demand, confidence, and global events can all influence a commodity market.

The commodities market is where basic agricultural products, raw materials and metals, such as gold, are bought and sold, often in large quantities and across global exchanges. Commodities are typically traded either in their physical form (like gold bars) at current market prices (spot prices) or through financial contracts, where investors buy or sell in futures markets. These are where a price is agreed today to buy or sell on a specific future date.

As with other commodities, the price of gold is determined by supply and demand. Demand for gold typically rises during times of economic uncertainty as investors want a safer store of value. This results in an increase in its price. Supply and demand, and hence price, also respond to other factors, including interest rates, currency movements, economic growth and growth prospects, and geopolitical events.

Record high prices

This year, the gold market has seen a remarkable rally, with the price of gold hitting a record high. Demand for the precious metal has resulted in spot prices surging over 35% to date (see the chart: click here for a PowerPoint). Rising prices earlier this year have been attributed to the US President, Donald Trump, announcing wide-ranging tariffs which have upset global trade. On 2 September, the spot gold price hit $3508.50 per ounce, continuing its upwards trend.

The price has also been lifted by expectations that the Federal Reserve (the US central bank) will cut its key interest rate, making gold an even more attractive prospect for investors. If the Federal Reserve cuts interest rates, the price of gold usually increases. This is because gold does not pay any interest or yield, so when interest rates are high, investors can earn better returns from alternatives, such as savings accounts or bonds. However, when interest rates fall, those returns become less attractive, making gold relatively more appealing.

Lower interest rates also tend to weaken the US dollar, which makes gold cheaper for foreign buyers, increasing global demand. Since gold is priced in dollars, a weaker dollar usually leads to higher gold prices.

Additionally, interest rate cuts are often a response to economic problems or uncertainty. As gold is viewed as a safer asset for investors during times of economic uncertainty, investors will typically increase their demand.

Unlike the market for currencies or shares, gold doesn’t rely on the performance of a government or company. This makes it attractive when people are worried about things like inflation, recession, war or stock market crashes. Gold is thus seen as a ‘safe haven’.

Gold and the Federal Reserve

The rise in the price of gold by more than a third this year can be linked to the US election last year, according to the director of research at BullionVault (see the BBC article below). Attitudes of the Trump administration towards the Federal Reserve have created concerns among investors. Fears that the US administration could erode the independence of the world’s most important central bank have fuelled the latest flows into the metal, which is traditionally viewed as a hedge against inflation.

According to the BBC article, Derren Nathan from Hargreaves Lansdown claims that it is Trump’s ‘attempts to undermine the independence of the Federal Reserve Bank’ that were ‘driving renewed interest in safe haven assets, including gold’. Investors are concerned that a politicised Fed would be more inclined to cut interest rates than would otherwise be the case, sending long-term inflation expectations higher.

This could lead to fears that future interest rates would then be pushed higher. This would increase the yields on longer-term government bonds by pushing down their price, as investors demand higher compensation for the increased risk of higher future interest rates reducing the value of their fixed-rate investments. This would force the US Treasury to pay higher interest on new bonds, making it more expensive to service US government debt.

Expected price rises for 2026

As we saw above, it is predicted that the price of gold will rise to $4000 per ounce next year. However, if the market sees investors move away from dollar assets, such as US Treasuries, the price increases would be even higher. Daan Struyven, co-head of global commodities research at Goldman Sachs explains ‘If 1 per cent of the privately owned US Treasury market were to flow to gold, the gold price would rise to nearly $5000 per troy ounce’ (see Financial Times article below).

If the Federal Reserve does come under political pressure, it could affect the stability of the US economy and beyond. When gold prices rise sharply, demand usually falls in countries like China and India, which are the world’s largest buyers of gold jewellery. However, in 2025, this trend has changed. Instead of reducing their gold purchases, people in these countries have started buying investment gold, such as bars and coins, showing a shift in consumer behaviour from jewellery to investment assets.

At the same time, global events are also influencing the gold market. Suki Cooper, a metals analyst at Standard Chartered, said that events like Russia’s invasion of Ukraine have added to political uncertainty, which tends to increase demand for gold as a safe-haven asset. She also highlighted how changes in international trade policies have disrupted supply chains and contributed to higher inflation, both of which have made gold more attractive to investors. Additionally, a weaker US dollar earlier in the year made gold cheaper for buyers using other currencies, which boosted global demand even further.

Conclusion

Although the gold market is expected to remain strong over the next six months, some uncertainty remains. Many analysts predict that gold prices will stay high or even increase further, especially if interest rates in the US are cut as expected. Continued global instability, is also likely to keep demand for gold as a safe haven high. At the same time, if inflation stays elevated or trade disruptions continue, more investors may turn to gold to protect their wealth.

However, if economic conditions stabilise or interest rates rise again, gold demand could fall slightly, leading to a potential dip in prices. Overall, the outlook for gold remains positive, but sensitive to changes in global economic and political events.

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Questions

  1. What factors influence the price of a commodity such as gold on the global market?
  2. Use a demand and supply diagram to illustrate what has been happening to the gold price in recent months.
  3. Find out what has been happening to silver prices. Are the explanations for the price changes the same as for gold?
  4. Why might investors choose to buy gold during times of economic or political uncertainty?
  5. How will changes in interest rates affect both the demand for and the price of gold?
  6. What are the possible consequences of rising gold prices for countries like India and China, where there is a traditionally high demand for gold jewellery?
  7. How do global events impact commodity markets? Use gold as an example in your answer.