AI Could Boost Inflationary Pressures in Short-Term

Adoption of artificial intelligence (AI) could add price pressure in the short term by boosting demand, although its full impact will not be felt soon. Heavy investment in AI technology is already boosting the economy and pointing to a surge in electricity demand as new data centers are built. In the short term, AI may boost demand more than it adds to supply by accelerating productivity growth. If that happens, the adoption of AI could increase inflationary pressures in the short term. With the proliferation of AI applications, central bankers, whose primary mandate is to keep stability and inflation low, have been considering how to use the technology to better predict changes in consumer prices and employment.

A better understanding of how AI will affect workers, consumers, the economy and inflation is needed. When combined with a more shock-prone world, the impact of AI suggests that inflation could be more volatile than it was 25 years before the pandemic. Central banks should embrace the benefits of AI, but should not allow it to replace humans when setting interest rates. There is no evidence that the rate of replacement of labor by AI will lead to a decline in total employment, but the broader impact of AI is difficult to predict.