Macklem warns AI may stoke inflation through demand boost

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Bank of Canada Governor Tiff Macklem warned that artificial intelligence technologies may add to inflationary pressures as well as price and labour volatility in the short run.

In a Friday speech in Toronto, Macklem said strong investment in AI is boosting demand as rising equity prices and hiring add to consumption. Electricity demand is also “surging” because of the massive computing requirements of the technology. If those forces outweigh the expansion of productive capacity, the result may be faster price growth.

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“AI could boost demand more than it adds to supply through faster productivity growth. And if that happens, AI adoption may add to inflationary pressures in the near term,” he said in prepared remarks.

Still, Macklem said the productivity gains of artificial intelligence adoption will increase supply and potential growth in the long run, allowing workers’ compensation and spending to rise with fewer price pressures.

“In the long run, we can expect AI to boost productivity. Higher productivity allows for higher wages and more spending without pushing up inflation,” he said.

The speech made no reference to the near term outlook for interest rates in Canada. Yearly price pressures hit the central bank’s two per cent target in August, and the comments suggest the central bank remains focused on potential upside risk to inflation even as they’re cutting interest rates.

Officials have already lowered borrowing costs three times since June, bringing the overnight rate to 4.25 per cent, and they’ve signaled more cuts to come. Markets are pricing about a 50 per cent chance that policymakers will lower the benchmark overnight rate by 50 basis points at their next meeting on Oct. 23.

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Macklem’s speech also warned that AI has the potential to add to volatility as it impacts the price-setting behaviour of companies, given evidence that digitally intensive firms change their prices more often than those who aren’t.

Assuming no impact to firms’ competition, “this means the Phillips curve might be steeper than previously thought,” Macklem said, “suggesting inflation could be more volatile than it was in the 25 years before the pandemic,” especially in a more “shock-prone world.”

The central bank governor said that there’s little evidence that AI is displacing employment at this point — and that digitalization and the commercialization of the technologies “have likely been net job creators in Canada.”

Still, the faster pace of adoption is also likely to disrupt the labour force, even while labour demand may be increased.

“In past change cycles the technology was diffused over a prolonged period, so the labour force had time to adjust. But this time adoption may happen much faster, creating more disruption and a loss of livelihoods that will be difficult to replace,” Macklem said.

Bloomberg.com

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