AI Could Increase Short-Term Inflationary Pressures, According to Reuters

Bank of Canada Governor Discusses AI’s Economic Impact

OTTAWA, Sept 20 (Reuters) – On Friday, Bank of Canada Governor Tiff Macklem indicated that the rise of artificial intelligence (AI) among businesses could create short-term inflationary pressures by increasing demand, although the broader effects may take time to materialize.

Macklem highlighted that significant investments in AI technologies are already contributing to economic growth and driving up electricity demand due to the establishment of new data centers.

"In the short run, AI could enhance demand more than it contributes to supply by accelerating productivity growth," Macklem stated at an AI conference in Toronto. "Should this occur, the adoption of AI may exacerbate inflationary pressures in the near term."

With the rapid uptake of AI, central banks, whose primary objective is to maintain stable and low inflation, are exploring ways to leverage AI for improved predictions regarding changes in consumer prices and employment trends. Macklem emphasized the need for central bankers to understand AI’s implications for workers, consumers, the economy, and inflation.

He noted that pairing AI with a world more susceptible to shocks could mean that inflation may be more erratic compared to the stable period of the prior 25 years before the pandemic.

The Bank for International Settlements (BIS) stated in June that central banks should recognize the benefits of AI while ensuring that human oversight remains critical in setting interest rates.

Macklem commented that there is currently no evidence suggesting that AI is displacing workers at a rate that would reduce overall employment, though he stressed the unpredictability of AI’s extensive effects.

The Bank of Canada is already utilizing AI for forecasting inflation, analyzing economic sentiment, verifying data, and enhancing operational efficiency, but has indicated that it is still in the early stages of implementation.

"In entering a dark room, you don’t rush in recklessly; you proceed cautiously and assess your surroundings," Macklem explained, illustrating the Bank’s approach to understanding how AI integrates into the economy.

Additionally, last year, Canada introduced a Voluntary Code of Conduct aimed at the responsible development and oversight of advanced generative AI systems, outlining guidelines that companies should adopt while working with such technologies.