AI productivity gains may not curb inflation, IMF's Tenreyro warns

LONDON, Aug 20 : Even if artificial intelligence boosts productivity, it may not lower inflation, the International Monetary Fund's new chief economist Silvana Tenreyro warned in research published by Bank of England staff on Thursday.

At first glance, higher economic productivity — producing more output for the same amount of inputs — looks as if it should lead to lower prices.

Federal Reserve Chair Kevin Warsh has said he hopes that the rollout of artificial intelligence will allow the U.S. economy to grow faster without causing higher inflation.

But Tenreyro, in an article co-written with BoE economist Jenny Chan and doctoral researcher Ludovica Ambrosino, said the inflation impact of highly anticipated productivity gains was ambiguous.

"Business investment and household spending (can) both move ahead of realised productivity gains, as many argue is happening now with investment in AI infrastructure," the researchers said.

If investment demand — or spending in anticipation of future gains from AI — comes before the economy has actually seen the promised improvement in productivity, that can lead to supply crunches, pushing up inflation and requiring higher interest rates, the analysis said.

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 research also said the inflation impact of productivity gains in general depended on whether they were felt more for exported goods or domestically produced services.

Productivity gains in services were more likely to lower domestic inflation, while those in exports tended to push up domestic wages and boost demand for supply-constrained services, raising inflation.

The research was published on the BoE's Bank Underground blog, a forum for BoE staff to share views which do not necessarily reflect the central bank's official view.

Tenreyro, a member of the BoE's Monetary Policy Committee from 2017 to 2023, contributed to the article in her role as a professor at the London School of Economics.