Bank of Canada Chief Warns: AI May Intensify Price Pressures Soon

Bank of Canada Governor Tiff Macklem warned that artificial intelligence technology could exacerbate inflationary pressures, price, and labor force volatility in the short term.

In a speech on Friday, Macklem said that robust investment in AI is boosting demand as stock prices rise and hiring increases consumption, and electricity demand is surging due to the technology's significant computational needs; if these demands outpace the expansion of production capacity, the result could be faster price growth.

Macklem stated, "AI can boost demand through faster productivity growth rather than increasing supply.

If this occurs, the adoption of AI could increase inflationary pressures in the short term."

However, he added that in the long run, the productivity gains from adopting AI will increase supply, enhance potential growth, allowing workers' wages and expenditures to rise with less price pressure.

Advertisement

He said, "In the long term, we can expect AI to increase productivity, and higher productivity will allow for higher wages and more spending without driving up inflation."

Macklem did not mention the near-term outlook for Canadian interest rates in his speech.

Canada's inflation rate reached the Bank of Canada's 2% target in August of this year.

Macklem's latest remarks suggest that despite the Bank of Canada being in a rate-cutting cycle, it is still concerned about potential upward risks to inflation.

Since June, the Bank of Canada has cut rates three times, reducing the benchmark rate to 4.25%, while hinting at further rate cuts.

The market currently expects a 50% chance of a 50 basis point rate cut by the Bank of Canada at its next meeting on October 23.

Macklem also warned in his speech that AI has the potential to increase volatility as it affects companies' pricing behavior, with evidence showing that digitally intensive firms change prices more frequently than others.

He said, "Assuming no impact on business competition, this means the Phillips curve could be steeper than previously thought.

This suggests that inflation could be more volatile than in the 25 years before the pandemic, especially in a world more prone to shocks."

Furthermore, Macklem stated that there is currently little evidence that AI is replacing jobs, and the digitization and commercialization of these technologies "could be a net creator of jobs in Canada."

However, even if labor demand may increase, a faster pace of AI adoption could also disrupt the labor market.

Macklem said, "In past cycles of transformation, the diffusion of technology took a long time, so the labor market had time to adjust.

But this time, the adoption could be faster, causing more disruption and loss of livelihoods that are hard to replace."