AI Productivity Gains May Not Necessarily Tame Inflation

The International Monetary Fund's new chief economist Silvana Tenreyro has warned that even if artificial intelligence boosts productivity, it may not lead to lower inflation. Research published by Bank of England staff on Thursday suggested that higher economic productivity should theoretically result in lower prices.

However, the study found that this might not be the case in reality. The researchers argued that business investment and household spending can move ahead of realised productivity gains, leading to supply crunches that push up inflation and require higher interest rates.

The analysis pointed out that prices of computer memory and graphics chips have surged over the past year due to demand from data centres, pushing up the prices of phones, laptops, and other consumer electronics. The researchers also noted that productivity gains in services are more likely to lower domestic inflation, while those in exports tend to push up domestic wages and boost demand for supply-constrained services, raising inflation.