AI Investment Boom May Fuel Inflation Before Boosting Productivity

Silvana Tenreyro, the new Chief Economist of the International Monetary Fund (IMF), has warned that the current AI investment boom may first fuel inflation and force central banks to raise interest rates. In a research paper published by Bank of England staff, Tenreyro and her colleagues found that even if AI boosts productivity in the long run, it may not necessarily lower inflation as expected.

The researchers pointed out that businesses and households are investing heavily in AI infrastructure ahead of schedule, driven by optimism about its future returns. However, actual productivity gains have yet to materialize, leading to a 'demand before supply' mismatch that could push up prices and force central banks to raise interest rates.

The study suggests that the impact of productivity gains on inflation is highly uncertain, with the key question being whether demand or supply moves first. If investment demand emerges before productivity improvements, it will lead to supply tightness, pushing up inflation and requiring higher interest rates.