AI may lead to inflationary pressures: Bank of Canada

Bank of Canada Governor Tiff Macklem said that investments in artificial intelligence (AI) may lead to higher inflationary pressures in the short term and cause financial stability issues. 

According to Macklem, AI may also affect how businesses set prices. There is already evidence that digitally intensive firms adjust prices more often than those that are less digitally focused.

“Central banks need to be closely attuned to how AI is affecting inflation, both indirectly through overall demand and supply and directly through price-setting behavior,” Macklem said.

Central banks “care a lot about prices” as it is in their mandates to keep price inflation low and stable. Elaborating on this thought, the Governor said:

“In the short run, 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.”

AI may cause financial stability issues

AI adoption could also lead to financial stability issues, the Governor pointed out. 

He said that banks and financial institutions are investing in AI to improve customer service, enhance compliance and risk management, and better assess credit and liquidity risk, and these investments are expected to improve efficiency and stability. 

But there are pitfalls, he said, as operational risks could become concentrated in a few third-party service providers, and an ‘event’ at one of them could quickly spread through the financial system. Elaborating, the Governor said:

“The predictive ability of AI can deteriorate unexpectedly, suffer from hallucinations or be biased and discriminatory. And AI makes everything move faster, which could amplify severe market runs and herding behaviour in times of market volatility.”

AI may leave displaced workers without jobs

AI could reduce non-automated tasks significantly, leaving displaced workers with insufficient job opportunities, the Governor said.

He acknowledged that while workers in lower-productivity jobs can be replaced by AI, they are freed up to fill other, more productive jobs in the economy. 

Related: Meta to resume AI training in UK after regulatory pause

However, more pessimistic estimates suggest that AI might have only a modest impact on productivity, he said, adding that AI could also create negative outcomes, such as amplifying internet addiction and enabling malicious actors. These adverse effects could substantially decrease the net positive impact of AI. 

Will AI make a real difference in crypto? Source: YouTube

According to Macklem, understanding and shaping the labor market impacts will be increasingly important as AI continues to advance and diffuse through economies. Elaborating further, he said:

“As AI becomes more established in the economy and its impacts more transformative, it could end up destroying more jobs than it creates. And the people who lose their work to automation may struggle to find new opportunities. This is a concern for us all.”

Bank of Canada using AI to forecast inflation, economic activity

The Governor informed that the Bank of Canada is using AI to forecast inflation, economic activity and demand for bank notes, track sentiment in key sectors of the economy, clean and verify regulatory data, improve efficiency and de-risk operations. 

Macklem said with very large and highly disaggregated data sets now available, there is huge potential to use AI to understand how consumers and businesses are behaving and how companies are setting their prices. 

Although much uncertainty remains, Macklem believes the recent rapid advances in AI, and GenAI, in particular, have the potential to transform economies around the world. 

“We need to better understand how AI will affect productivity, employment, price-setting behavior and inflation. This work will take time. In the interim, we should use increasingly informed scenarios to help manage our uncertainty,” the Governor concluded.

Magazine: AI may already use more power than Bitcoin — and it threatens Bitcoin mining