Bank of Canada Gov: AI Investments Could Add Short-Term Inflationary Pressure

By Paul Vieira

OTTAWA--Investments in productivity-enhancing artificial intelligence are boosting demand in the economy, and that could put upward pressure on inflation in the short term, Bank of Canada Gov. Tiff Macklem said Friday.

Macklem said wider AI adoption could prompt companies to change prices more frequently, leading to more volatile periods of inflation relative to the prepandemic period.

Macklem was scheduled to deliver the prepared remarks to a Toronto audience Friday. The speech focused entirely on the impact of AI on the economy, and didn't address recent Canadian economic data such as inflation, the U.S. Federal Reserve's decision to cut its main interest rate by a half point, or whether the Bank of Canada is eyeing a similar deep cut next month.

In the longer term, policymakers expect the adoption of AI to increase productivity, or output per hour worked, which would allow for higher wages and more spending without pushing up inflation, Macklem said.

In the near term, "strong investment in AI technologies is boosting demand in the economy," Macklem said, citing the recent runup in stock markets and a hiring boom for workers with AI-related skills. Electricity demand is also surging, he said, with companies building data centers to accommodate AI's enormous computing requirements.

"AI could boost demand more than it adds to supply through faster productivity growth," Macklem said. "And if that happens, AI adoption may add to inflationary pressures in the near term."

Inflation in Canada returned in August to the Bank of Canada's 2% target for the first time since early 2021.

Macklem added AI could lead to more frequent price changes by firms for their goods and services. He said there's already evidence that digitally-intensive firms change prices more frequently.

"When combined with a more shock-prone world, this suggests inflation could be more volatile than it was in the 25 years before the pandemic," he said.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

September 20, 2024 08:32 ET (12:32 GMT)

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