Category: Essential Economics for Business: Ch 11

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Youth unemployment and the post-pandemic peak

Unemployment in the UK reached its highest level in nearly five years at the close of 2025, according to new data from the Office for National Statistics. Figures show the unemployment rate rising to 5.2% in the three months to December, up slightly from 5.1% in the preceding quarter.

This marks the highest unemployment level since the pandemic, coinciding with a slowdown in wage growth and increasing speculation that interest rates may soon be lowered.

Youth unemployment

However, young people are taking the heaviest hit, with unemployment climbing to 16.1% among those aged 16 to 24. (Click here for a PowerPoint of the chart.) This is the highest level in more than a decade, including the spike seen during the pandemic. Economists largely attribute this trend to rising payroll costs, which they say are discouraging employers from offering entry level roles. Long-term youth unemployment is also worsening, with recent data showing that a growing share of unemployed young people have been out of work for over 12 months, highlighting deeper and more persistent barriers to re entry.

At the same time, although wages for those in work continue to grow faster than prices, the pace of wage growth is steadily slowing, adding further pressure on young people already facing the most challenging labour market conditions in years. According to ONS data, the annual growth in average weekly wages, excluding bonuses, slowed to 4.2% in the last three months of 2025. Private-sector wage growth eased to 3.4%, bringing it closer to the 3.25% rate that the Bank of England believes is consistent with its 2% inflation target.

The impact on interest rates

The Bank of England is watching the slowdown in the UK jobs market closely as it gauges when next to lower its interest rates. In February 2026, the Monetary Policy Committee voted to hold the base rate (Bank Rate) at 3.75%. However, the committee voted with a majority of 5-4, with four members voting to reduce the rate to 3.5%.

The Bank of England uses interest rates as a policy tool to control inflation, the rate at which general prices rise in the economy. The current rate of inflation of 3.4% is above the Bank of England’s target of 2%.

In addition to the split vote, some economists believe that the easing in pay growth makes it likely that Bank Rate will be cut at the next meeting on 19th March. Paul Dales, chief UK economist at Capital Economics, said the fall in wage growth ‘supports the idea that the Bank of England has at least a couple more interest rate cuts in its locker’. A decrease in interest rates will be welcomed by investors.

What is behind the increase in youth unemployment?

Young people always tend to be the most impacted by a downturn in hiring. But economists warned that the rise in youth unemployment was a sign that employers are being more cautious about hiring younger workers. Openings for low-skilled entry-level roles and for new graduates have dropped steeply. Many businesses have slowed hiring due to an increase in costs because of measures in Chancellor Rachel Reeves’s last two Budgets. Businesses claim that the combination of increases in employer National Insurance contributions and a rise in the minimum wage mean they are facing higher payroll costs.

Peter Dixon at the National Institute for Economic and Social Research said, ‘there are indications that younger workers in particular are being priced out of the market’, supporting the explanation that raising the minimum wage might also be disincentivising the hiring of young people.

The ONS reported that the retail and wholesale sector saw the biggest fall in the number of workers on company payrolls, with 65,000 jobs lost in the sector since January last year. Meanwhile, health and social work saw the biggest rise in payrolled workers of any sector, adding 39,000 jobs in the year to January. Financial analyst at AJ Bell, Danni Hewson, suggested that those leaving the retail sector were now entering healthcare, with both sectors employing large numbers of women. However, she also warned that a recent surge in investment in artificial intelligence could hit young people the hardest as it could result ‘in a scarcity of entry level posts’ (see the blog Will AI make the world less equal?.

Job vacancies

Job vacancy data across the UK indicates a significant cooling in labour demand. According to the latest ONS figures, vacancies fell from 736,000 in the three months to December to 726,000 in January, signalling continued weakening in hiring activity. According to the job search site, Adzuna, the number of vacant positions has dropped to its lowest level in five years, with job listings sliding 3% in January to 695,000, marking the first time vacancies have dipped below 700,000 since early 2021. Notably, graduate opportunities have fallen below 10,000 for the first time since Adzuna started tracking in 2016, underscoring the deepening challenges for new entrants to the workforce.

This downward trend in job openings extends patterns seen throughout late 2025, with vacancies down 16% from the previous January and nearly 20% lower than six months earlier. This coincides with a rise in unemployment to 5.2%, slower wage growth, and a growing concern that young people are disproportionately affected as hiring slows. As opportunities shrink, competition has intensified: there are now 2.4 jobseekers per vacancy, up from 2.27 in December, with the most sought-after roles including warehouse staff, healthcare support workers, lorry drivers, labourers and kitchen assistants.

How can the situation be improved?

Pat McFadden, Secretary for Work and Pensions, has commissioned the former Health Secretary Alan Milburn to lead a review into the causes of rising youth inactivity. There will be a particular focus on mental health issues that are pushing young people out of education and employment. This initiative responds to the growing number of young people not in education, employment, or training (NEETs), many of whom are now classified as inactive rather than unemployed. Some receive health-related benefits and are therefore not required to look for work, while others fall outside the benefits system entirely, making them harder to identify and support.

However, Pat McFadden said there was ‘more to do to get people into jobs’, and that tackling youth unemployment is a key government priority. He added that Labour was working to make it easier for young people to find and secure an apprenticeship, supported by a wider package of reforms. The reforms announced by McFadden include creating 50,000 additional apprenticeships. The government will also expand support for 350,000 people to move into work or training in sectors such as care and construction, with the risk of losing benefits if they refuse. They also include the provision of 55,000 state-funded, six-month work placements for the long-term unemployed.

While these measures are widely seen as necessary, campaign groups argue the government should go further by extending its ‘Youth Guarantee’ to cover all young people up to age 24, rather than ending at 22.

However, as Alice Martin, head of research at Lancaster University’s Work Foundation, notes, initiatives designed to help people return to the labour market have limited impact ‘if the jobs aren’t out there.’ Even graduates are finding that opportunities are scarce, and for those leaving education with few qualifications, the situation is even more challenging. Sectors such as retail, once a reliable source of first jobs, have been in long-term structural decline, a trend that is now accelerating and further narrowing the pathways available to young people entering the workforce.

The situation has prompted government discussions about postponing the planned rise in the minimum wage for 18- to 20-year-olds to address employers’ concerns and encourage more youth employment. However, on Wednesday, Keir Starmer stressed that Labour remains committed to its manifesto pledge to align the pay of younger workers with that of older employees. The Prime Minister confirmed that the promise to ‘remove the discriminatory age bands’ in the minimum wage system still stands, and that the increase scheduled for April will proceed as planned.

Starmer said ‘We’ve made commitments to young people in our manifesto, and we will keep to those commitments, including the commitment that we would make sure that the living wage and minimum wage will go up this April, which we can absolutely confirm to you will happen.’

Unemployment outlook

Multiple economic forecasts predict that unemployment will to continue to rise in 2026. The most frequently cited projection places the 2026 unemployment rate around 5.2%–5.5%. However, some economists expect businesses to regain confidence and begin hiring again later in the year, supporting a gradual stabilisation in job markets.

Yet risks remain significant: if that recovery fails to materialise, unemployment could edge toward 6% by the end of the year, with forecasts from JP Morgan suggesting unemployment may reach 2 million in the first half as firms delay recruitment following the recent rise in the employers’ National Insurance rate. This environment is proving especially challenging for young people, with early career opportunities among the first to disappear and delayed entry into work potentially limiting long-term earnings and progression.

As hiring becomes more cautious and entry-level roles tighten, the path into the labour market risks becoming narrower, underscoring the need for policies and conditions that support both employer confidence and opportunities for new entrants.

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Questions

  1. Explain why youth unemployment has risen more sharply than overall unemployment at the end of 2025.
  2. What are the costs to the individual of being unemployed?
  3. What are the wider non-monetary costs to society?
  4. Explain the main financial costs to the wider economy of a rising unemployment rate.
  5. Assess the likely impact of slowing wage growth on the Bank of England’s decision about whether or not to cut interest rates in early 2026.
  6. Discuss how falling job vacancies, particularly graduate and entry‑level opportunities, might affect long‑term labour market outcomes for young people.
  7. Evaluate the effectiveness of government policies such as expanding apprenticeships, increasing work placements, and reviewing youth inactivity in reducing youth unemployment.
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The Russian economy after four years of war

At the fourth anniversary of Russia’s invasion of Ukraine, we look at the effect of the war on the Russian economy. Two years ago, in the blog The Russian economy after two years of war, we argued that the Russian economy had seemingly weathered the war successfully.

Unlike Ukraine, very little of its infrastructure had been destroyed; it had started the war with a current account balance of payments surplus, a budget surplus and a low general government debt-to-GDP ratio; it had achieved a lot of success in diverting its exports, including oil, away from countries imposing sanctions to countries such as China and India; it was the same with imports, with China especially becoming a major suppliers of machinery, components and vehicles; it has a strong central bank, which engenders a high level of confidence in managing inflation; the military expenditure provided a Keynesian boost to the economy, with production and employment rising.

The situation today

But two years further on, the Russian economy is looking a lot weaker and on the verge of recession. GDP growth fell to 0.6 per cent in 2025 and is forecast to be no more than 1 per cent for the next two years. (Click here for a PowerPoint of the chart.) And despite growth still being positive (just), this is largely because of the growth in military expenditure. Retail and wholesale trade fell by 1.1% in 2025, reflecting supply chain problems and high inflation dampening consumer demand.

With labour being diverted into the armaments and allied industries or into the armed forces, this has led to labour shortages. This has been compounded by the emigration of up to 1 million people by 2025 – often young, educated and skilled professionals.

Official CPI inflation averaged 8.7 per cent in 2025, although the prices of food and other consumer essentials rose by more, especially in recent months. At the beginning of 2026, supermarket prices rose by 2.3% in just one month, made worse by a rise in VAT from 20% to 22%. The central bank has responded to the high inflation with high interest rates, which averaged 19.2% in 2025, giving a real rate of 10.5%. With such a high real rate, the response of households has been to save. This has masked the constraints on production, or imports, of consumer goods. Savings have also been boosted by large payments to soldiers and bereaved families, with the money saved by the recipients being used in part to fund future such payments. So far there has been trust in the banking system, but if that trust waned and people starting making large withdrawals of savings, it could be seriously destabilising.

Whilst the high real interest rates have helped to mask shortages of consumer goods, they have had a seriously dampening effect on investment by domestic companies. Gross capital formation fell by 3% in 2025, not helped by an increase in the corporation tax from 20% to 25%. At the same time, foreign direct investment remains subdued due to high perceived risks. The lack of investment, plus the labour shortages, will have profound effects on the supply side of the economy, with potential output in the non-military sector likely to decline over the medium term.

The balance of payments and government finances are turning less favourable. The balance of trade surplus has declined from US$173bn in 2021 to US$67bn in 2025. This could decline further, or even become a deficit, if oil prices continue to be weak, if Western sanctions are tightened (such as stopping the flow of Russian oil exports in the ‘shadow’ fleet of tankers) or if major importing countries stop buying Russian oil. Indian refiners have announced that they are not taking Russian crude in March/April as India seeks to finalise a trade deal with the USA.

The budget balance has moved from a small surplus of 0.8% of GDP in 2021 to a deficit of 2.9% in 2025. Although the government debt-to-GDP ratio remains low by international standards at 23.1% of GDP in 2025, this was up from 16.5% in 2021 and is set to rise further as budget deficits deepen. Nevertheless, as long as the saving rate remains high, the debt can be serviced by domestic bond purchase.

Russia’s economy is definitely weakening and labour shortages and low investment will create major problems for the future. But whether this deterioration will be enough to change Russia’s stance on the war in Ukraine remains to be seen.

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Questions

  1. What constraints are there currently on the supply side of the Russian economy?
  2. Some economists have argued that the economic effects of a stalemate in the Ukraine war would suit the Russian leadership more than peace or victory. Why might this be so?
  3. Under what circumstances might a deep recession in Russia be more likely than stagnation?
  4. In what ways does Russia’s current financial system resemble a pyramid scheme?
  5. What cannot a Keynesian boost contunue to support the Russian economy indefinitely?
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Fed independence under attack

Donald Trump is keen to lower US interest rates substantially and rapidly in order to provide a boost to the US economy. He is also keen to reduce the cost of living for US citizens and sees lower interest rates as a means of reducing the burden of debt servicing for both consumers and firms alike.

But interest rates are set by the US central bank, the Federal Reserve (the ‘Fed’), which is formally independent from government. This independence is seen as important for providing stability to the US economy and removing monetary policy from short-term political pressures to cut interest rates. Succumbing to political pressures would be likely to create uncertainty and damage long-term stability and growth.

Yet President Trump is pushing the Fed to lower interest rates rapidly and despite three cuts in a row of 0.25 percentage points in the last part of 2025 (see chart below), he thinks this as too little and is annoyed by suggestions that the Fed is unlikely to lower rates again for a while. He has put great pressure on Jerome Powell, the Fed Chair, to go further and faster and has threatened to replace him before his term expires in May this year. He has also made clear that he is likely to appoint someone more willing to cutting rates.

The Federal Reserve headquarters in Washington is currently being renovated. The nine-year project is costing $2.5 billion and is due to be completed next year. President Trump has declared that the project’s costs are excessive and unnecessary.

On 11 January, Federal prosecutors confirmed that they were opening a criminal investigation into Powell, accusing him of lying to Congress in his June 2025 testimony regarding the scope and costs of the renovations.

Powell responded by posting a video in which he claimed that the real reason that he was being threatened with criminal charges was not because of the renovations but because the Fed had ignored President Trump’s pressure and had set interest rates:

based on our best assessment of what will serve the public, rather than following the preferences of the President. This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions – or whether, instead, monetary policy will be directed by political pressure or intimidation.

The Fed’s mandate

The Federal Reserve Board decides on monetary policy and then the Federal Open Market Committee (FOMC) decides how to carry it out. It decides on interest rates and asset sales or purchases. The FOMC meets eight times a year.

The Fed is independent of both the President and Congress, and its Chair is generally regarded as having great power in determining the country’s economic policy.

Since 1977, the Fed’s statutory mandate has been to promote the goals of stable prices and maximum employment. Because of the reference to both prices and employment, the mandate is commonly referred to as a ‘dual mandate’. Its inflation target is 2 per cent over the long run with ‘well anchored’ inflationary expectations.

The dual mandate is unlike that of the Bank of England, the European Central Bank, the Bank of Japan and most other central banks, which all have a single key mandate of achieving a target of a 2 per cent annual rate of consumer price inflation over a particular time period.

With a dual mandate, the two objectives may well conflict from time to time. Moreover, changes in monetary policy affect these objectives with a lag and potentially over different time horizons. Hence, an assessment may have to be made of which is the most pressing problem. This does give some leeway in setting interest rates somewhat lower than if there were a single inflation-rate target. Nevertheless, the assessment is in terms of how best to achieve the mandate and not to meet current political goals.

Statement by former Fed Chairs and Governors

On 12 January, three former Chairs of the Federal Reserve (Janet Yellen, Ben Bernanke and Alan Greenspan), four former Treasury Secretaries (Timothy Geithner, Jacob Lew, Henry Paulson and Robert Rubin) and seven other top former economic officials issued the following statement (see Substack link in the Articles section below):

The Federal Reserve’s independence and the public’s perception of that independence are critical for economic performance, including achieving the goals Congress has set for the Federal Reserve of stable prices, maximum employment, and moderate long-term interest rates. The reported criminal inquiry into Federal Reserve Chair Jay Powell is an unprecedented attempt to use prosecutorial attacks to undermine that independence. This is how monetary policy is made in emerging markets with weak institutions, with highly negative consequences for inflation and the functioning of their economies more broadly. It has no place in the United States whose greatest strength is the rule of law, which is at the foundation of our economic success.

Response of investors

What will happen to the dollar, US bond prices, share prices and US inflation, and what will happen to investment, depends on how people respond to the threat to the Fed’s independence. Initially, there was little response from markets, with investors probably concluding that President Trump is unlikely to be able to sway FOMC members. What is more, several Republican lawmakers have begun criticising the Trump administration’s criminal investigation, making it harder for the President to influence Fed decisions.

Even if Powell is replaced, either in the short term or in May, by a chair keen to pursue the Trump agenda, that chair will still be just one of twelve voting members of the FOMC.

Seven are appointed by the President, but serve for staggered 14-year terms. Four have been appointed by President Trump, but the other three were appointed by President Biden, although one – Lisa Cook – is being indicted by the Supreme Court for mortgage fraud, with the hearing scheduled for January 21. She claims that this is a trumped-up charge to provide grounds for removing her from the Fed. If she is removed, President Trump could appoint a replacement minded to cut rates.

The other five members include the President of the New York Fed and four of the eleven other regional Fed Presidents serving in rotation. These four are generally hawkish and would oppose early rate cuts.

Thus it is unlikely that President Trump will succeed in pushing the Fed to lower interest rates earlier than they would have done. For that reason, markets have remained relatively sanguine.

Nevertheless, Donald Trump’s actions could well cause investors to become more worried. Will he try to find other ways to undermine the Fed? Will his actions over Venezuela, Cuba, Greenland and Iran, let alone his policies towards Ukraine and Russia and towards Israel and Gaza, heighten global uncertainty? Will his actions towards Venezuela and his desire to take over Greenland embolden China to attempt to annex Taiwan, and Russia to continue to resist plans to end the war in Ukraine or to make stronger demands?

Such developments could cause investor confidence to wane and for stock markets to fall. Time will tell. I think we need a crystal ball!

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Questions

  1. What are the arguments for central bank independence?
  2. What are the arguments for control of monetary policy by the central government?
  3. Assess the above arguments.
  4. Find out what has happened to interest rates, the US stock market and the dollar since this blog was written.
  5. How do the fiscal decisions by government affect monetary policy?
  6. Compare the benefits of the dual mandate system of the Fed with those of the single mandate of the Bank of England and ECB.
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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

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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.