Alarmingly on the rise, as businesses increasingly use AI, this calls out a growing concern about its potential impact on inflation and price stability.
In fact, Bank of Canada Governor Tiff Macklem has warned that though artificial intelligence brings long-term gains, it may place temporary pressures on prices through higher demand in the economy.
Though its full impact shall not be seen overnight, the signs emanating from it already are important, mainly in rising electricity demands due to the building of more data centers to support these technologies.
Short-Term AI Adoption to Fuel Inflation
As reported by Bloomberg, Macklem pointed out that the tremendous investment in AI technologies is already driving the economy. High demand, however, will likely result in higher prices, adding to inflationary pressures.
The more AI assumes importance in different sectors, the more trying it makes the work of central bankers trying to predict what impact it could have on inflation and the entire economy.
Since the Bank of Canada (BoC) is focused on maintaining inflation stable and low, it must keep pace with all these technological developments.
"In the short run, AI could boost demand more than it adds to supply through faster productivity growth," Macklem said at an AI conference in Toronto. AI adoption may add to inflationary pressures in the near term if that happens," he said.
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Use of AI in Predictions from the Perspective of a Central Bank
Since AI remains increasingly integrated into the different sectors of the economy, it is equally the same period that central banks are developing the concept of how the same technology may assist them in predicting instances of price level change of consumers and employment patterns.
Macklem said that the central bankers need to better understand how the increasing impact of artificial intelligence at work will affect people in general and the economy.
With the world being rendered increasingly susceptible to economic shocks, AI may introduce volatility into inflation, making it very difficult to maintain the price stability that has been in place for over 25 years.
The Bank for International Settlements recently addressed these concerns, stating that while central banks should embrace the benefits of AI, human oversight, mainly when crafting interest rates, is necessary. This ensures that critical economic decisions won't be left to algorithms alone but instead with a level of caution in monetary policymaking.
AI and the Labor Market: No Immediate Job Losses
While fears over job displacement because of AI are rampant, Macklem testified that so far, the evidence for significant adverse impacts of AI on total employment is still lacking.
However, he also warned that long-term effects are very hard to project as AI continues to reshape entire industries and modify the functions of certain jobs, Reuters reports.
That uncertainty is why central bankers pay close attention to such development.
View of the Bank of Canada on AI
In fact, the BoC already has numerous mainstream applications of AI, such as forecasting inflation, monitoring the sentiment of the economy, and improving operational efficiency.
Nevertheless, Macklem recently stated that, after all these developments, the central bank is still standing at the doorstep to embrace AI, having used the metaphor of entering a dark room while being cautious and slow with gathering information so as not to go wrong. This processful incorporation helps BoC learn about AI's economic implications and change its policies.
Code of Conduct for Responsible AI in Canada
The country has responded to the rapid growth of AI with a Voluntary Code of Conduct outlining the proper use and handling of AI systems. The initiative encourages companies to engage in ethical mechanisms for developing and deploying high technologies of advanced AI to ensure powerful tools are used responsibly without undermining economic stability.
Indeed, AI is already transforming many sectors, and its impact on inflation and economic movement may be unavoidable. As it will bring long-term growth and productivity, central banks, like the Bank of Canada, need to cautiously notice the short-run challenges of AI.
By taking the power of AI in forecasting along with human supervision, policymakers try to keep off price instability while adjusting to an ever-changing technological setting.
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