Why we expect prices to fall

Last year, MoneyWeek worried about inflation. This year we’re putting that behind us. Now we’re worrying about deflation instead. Merryn Somerset Webb explains.

Last year, MoneyWeek worried about inflation. This year we're putting that behind us. Now we're worrying about deflation instead. The official inflation numbers may still be knocking around 5% and we haven't completely discounted the possibility that the unions will be able to force through 5% pay rises for members.

But look at the prices of the things that have been driving the UK consumer price index oil, for example. Remember the forecasts of $400 oil? And the pathetic sight of Western world leaders begging the Saudis to bump up production? All gone. Today the Gulf states will be lucky to see oil stay at $100 (for what it's worth, we suggested earlier this year that $80-$90 would be a reasonable resting place for the price). Opec, far from humouring George W Bush by looking for ways to squeeze a few extra drops out of its ageing oil wells and keep prices down, is attempting to impose production cutting discipline on to its members in order to keep them up (so far without much success). That will all start feeding into the official numbers over the next few months.

The same goes for food prices. Supermarket data still suggest prices are rising, but look to the commodity markets and you'll see that most grain prices have fallen significantly in the last few months. Then venture down the high street, where desperate retailers are offering big discounts on everything from shoes to sofas. And even online there are bargains galore. On eBay, says the Daily Mail, the average price of a home entertainment system has fallen from £99.58 three months ago to £62.49 today.

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Does all this make it time to dump gold? Probably not. In Why gold will shine again, Dominic Frisby says he's hanging on. I am too not necessarily in the expectation of making much money, but as insurance against all the nasties that come with the uncertainties of recession. We look at this in more detail in next week's roundtable, but in the meantime investors might look to the gilt market. If the next move in interest rates is to be down, that's where your money should be heading.

Still, while the prices of most commodities are falling, the price of one is holding up rather too well that of CEOs. It isn't often I find myself agreeing with The Guardian's Polly Toynbee, but she has a point when she says that it isn't acceptable for the average CEO of a listed firm to be paid 70 times the average wage (compared to 20 times 15 years ago). The CEOs say they have to be paid silly money (they call it "competitive international rates") or they'll go and do something else.

But what exactly? The idea that the head of a mid-sized UK firm is capable of swapping his job for a $10m job in the US is much like the idea that UK council leaders should be paid £200,000 each because that's what they could make in the private sector nonsense. Fingers crossed, this is where deflation (or common sense, at least) hits next.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.