The messy interplay between AI, productivity and inflation
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Brendan Lynch/Axios
Economists and analysts say that AI in the long term will make the economy more productive — we'll get more done in less time, and that might even keep inflation in check.
Why it matters: It's a long complicated road to get to that fairy-tale ending. In the short term, AI is actually increasing inflation modestly at a time of more urgent inflationary pressures like war.
How it works: Tech moves fast, but people move slow. It will take time for companies to figure out what to actually do with all this amazing technology.
- "It is unlikely that most corporations have realized significant cost savings from the deployment of the newest AI models yet and even less likely that they would have passed on cost savings to consumers," David Kelly, JPMorgan Asset Management's chief global strategist, wrote in a note Monday.
Zoom in: In the short term, he writes, AI spending is increasing inflation in three areas:
- Electricity. Consumer electricity prices rose 4.6% in March from last year — reflecting in part the data centers that are powering AI models.
- Construction. Wages for construction workers are up 4.3% from last year, compared with 3.5% for all workers, on the back of surging demand to build those data centers.
- Memory chips. Prices for memory chips are soaring as AI-driven demand grows, adding to costs for manufacturers of laptops, smartphones and even vehicles.
Reality check: This AI-driven inflation is likely less of an issue at the moment than, say, the higher prices for oil and other supplies that have been driven by the Iran war.
What to watch: President Trump's pick to run the Federal Reserve, Kevin Warsh, has argued that the productivity surge unleashed by AI will reduce inflation, justifying lower interest rates.
- The topic is likely to come up later Tuesday at Warsh's confirmation hearing.
The big picture: Whether or not AI leads to more or less inflation is a simple question with a complex answer.
- It's hard to isolate, for example, how the dot-com transformation impacted prices because it happened at the same time as trade globalization.
- With AI, it's going to be hard to separate the tech transformation from the effects of the war or the crackdown on immigration — or whether or not the U.S. economy slides into recession.
Friction points: To understand how difficult it can be to untangle a topic like this, consider what happens with tech adoption in an economic slowdown:
- Companies might accelerate AI adoption as they cut workers. That's what happened in the pandemic, when companies rapidly adopted videoconferencing, a technology that had been around for a while.
- But if companies don't really know what to do with AI and a slowdown hits, then they could pull back on AI spending.
- Also, if AI really achieves amazing productivity and leads to sweeping unemployment — we would get disinflation. But not the good kind.
Zoom out: "There are a bunch of different ways that this could go, and I don't think we should be overly certain about which one it is," Martha Gimbel, executive director at the Budget Lab at Yale, tells Axios.
Flashback: There is a precedent for new technology raising productivity and bringing down prices: The Industrial Revolution led to what's called the Great Deflation in the 1870s, Gimbel notes.
The bottom line: Companies are spending trillions of dollars on AI in hopes that it will magically boost productivity — but the wizardry will take time.
