1 week ago
AI Productivity Gains May Not Lower Inflation, IMF Economist Warns
Artificial intelligence might help businesses make more goods and services with the same resources.
That sounds like it should make prices fall.
But people and companies may spend heavily on AI before it actually improves production.
If supplies cannot keep up with that spending, prices could rise instead.
This is already happening with some computer chips used by data centers.
Productivity improvements in local services may help reduce inflation.
Improvements in exported goods could instead raise wages and demand for other services.
Researchers therefore say AI’s effect on inflation is uncertain.
IMF chief economist Silvana Tenreyro warned that AI-driven productivity gains may not automatically reduce inflation.
Research co-written with Jenny Chan and Ludovica Ambrosino said spending may rise before productivity improvements materialize.
Early AI investment could create supply shortages, increasing inflation and requiring higher interest rates.
Surging demand for data-center equipment has raised prices for memory chips, graphics chips, phones and laptops.
Productivity gains in domestic services may reduce inflation, while export gains could raise wages and demand for constrained services.
- Who
- Silvana Tenreyro, Jenny Chan and Ludovica Ambrosino wrote the research; Federal Reserve Chair Kevin Warsh has expressed optimism about AI-driven growth.
- What
- Research warned that AI-related productivity gains may have an ambiguous effect on inflation rather than automatically lowering prices.
- Where
- The research appeared on the Bank of England’s Bank Underground blog.
- When
- The research was published on Thursday; Tenreyro previously served on the Bank of England’s Monetary Policy Committee from 2017 to 2023.
- Why
- Investment and spending may occur before productivity gains, creating supply pressures; the inflation effect also depends on whether gains occur in exports or domestic services.
Inflation Caution
Growth Optimism
Effect of AI productivity gains
Inflation Caution
Tenreyro and her co-authors said the inflation impact is ambiguous and that early investment could raise prices if supply cannot keep up.
Growth Optimism
Kevin Warsh has said AI’s rollout could allow the United States economy to grow faster without causing higher inflation.
Timing of investment
Inflation Caution
The researchers argued that business investment and household spending may move ahead of actual productivity improvements, creating inflationary pressure.
Growth Optimism
The optimistic view anticipates that realized AI productivity gains will expand economic capacity enough to support faster growth without higher inflation.
Key facts
- Research authors
- Silvana Tenreyro, Jenny Chan and Ludovica Ambrosino
- Publication
- Bank of England’s Bank Underground blog
- AI investment concern
- Spending on AI infrastructure may precede realized productivity gains and create supply crunches.
- Technology prices
- Computer memory and graphics chip prices have surged over the past year because of data-center demand.
- Domestic services
- Productivity gains in services are more likely to lower domestic inflation.
- Export productivity
- Productivity gains in exports may increase domestic wages and demand for supply-constrained services.
- Policy implication
- Supply pressures could increase inflation and require higher interest rates.
Quotes
Silvana Tenreyro
IMF new chief economist
“If investment demand — or spending in anticipation of future gains from AI — comes before the economy has actually seen the promised improvement in productivity, that can lead to supply crunches, pushing up inflation and requiring higher interest rates.”
CNBC TV 18
“Business investment and household spending (can) both move ahead of realised productivity gains, as many argue is happening now with investment in AI infrastructure.”
CNBC TV 18
Sources
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