Economists at the Bank for International Settlements have issued a warning that the surge in artificial intelligence is distorting the economic signals central banks rely on to set monetary policy, increasing the risk of costly policy errors.
The Basel-based institution, which advises central banks globally, stated that AI's profound impact on investment, trade, and asset prices is powerful enough to "change the global economic outlook in real time," bolstering growth amid trade frictions and geopolitical shocks.
Researchers noted these effects are now "significant and clearly visible" and may also amplify upward price pressures. Spending on data centers and information technology manufacturing facilities in the United States has risen to 0.8% of GDP, while the wealth effect from rising stock markets is boosting household consumption.
On the other hand, AI could have a disinflationary effect if it boosts productivity, or if market fears about job losses from AI curb consumer spending and weaken worker bargaining power.
Where to start
BIS economists cautioned that assessing the scale and timing of these various impacts is extremely challenging for central banks. Strong GDP growth may simply be a temporary result of an investment boom and wealth effects, while the potential for sustained productivity gains remains "uncertain and difficult to quantify."
In an analysis published Tuesday in the BIS's latest monthly bulletin, researchers wrote: "The relative strength and timing of these opposing forces are not yet determined. Short-term inflationary effects may already be appearing, while deflationary effects will likely materialize gradually."
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The BIS research team pointed out that increased uncertainty will raise the risk of "calibration errors" in monetary policy. If central banks overestimate productivity improvements or underestimate the expansion of domestic demand, they might keep interest rates too low to contain inflation.
The study comes as the U.S. Federal Reserve begins a two-day policy meeting. There is growing market concern that the AI boom is fueling price pressures in the American economy.
Federal Reserve Chairman Kevin Warsh believes the U.S. is on the cusp of an AI-driven productivity renaissance, which would create room for the Fed to cut rates without reigniting inflation. However, some Fed policymakers warn that, in the short term, investment in data centers and rising demand for AI-related products will push prices higher.
With inflation still more than double the Fed's target as measured by its preferred personal consumption expenditures index, Warsh faces increasing pressure to demonstrate the central bank's commitment to price stability to the markets.
Other major central banks are also grappling with the uncertainties brought by AI. European Central Bank Chief Economist Philip Lane said earlier this month that the ultimate impact of AI depends on whether the technology replaces labor or helps workers become more productive, as well as whether energy supply can keep pace with the growing electricity demands of computing power.
Lane stated that assessing the combined impact of AI on inflation will become a "major challenge" for central banks in the coming years.
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