Bank of Canada Cautions on AI's Short-Term Inflation Impact

Bank of Canada Cautions on AI's Short-Term Inflation Impact

OTTAWA, Sept 20 (Reuters) - Tiff Macklem, Governor of the Bank of Canada, indicated on Friday that the rapid adoption of artificial intelligence (AI) by businesses could contribute to inflationary pressures in the near term by increasing demand, even though its broader effects may take time to materialize.

Speaking at an AI conference in Toronto, Macklem noted that substantial investments in AI technology are already stimulating economic activity and driving up electricity consumption due to the establishment of new data centers. He remarked, "In the short run, AI could boost demand more than it adds to supply through faster productivity growth," suggesting that this imbalance might heighten inflation in the immediate future.

As AI adoption accelerates, central bankers are contemplating how to harness the technology to enhance their predictions regarding consumer prices and employment trends. Macklem emphasized the need for a deeper understanding of AI's implications for workers, consumers, the overall economy, and inflation dynamics.

He warned that in conjunction with a more unpredictable global landscape, the influence of AI could lead to greater volatility in inflation rates compared to the stability observed in the quarter-century preceding the pandemic. The Bank for International Settlements (BIS) has similarly urged central banks to leverage AI's advantages while ensuring that human judgment remains central to interest rate decisions.

While Macklem asserted that there is currently no evidence suggesting widespread displacement of workers due to AI, he acknowledged the challenges in predicting its comprehensive effects. The Bank of Canada is actively employing AI for various purposes, including inflation forecasting and economic sentiment analysis, but Macklem described its adoption as being in the early stages.

Using a metaphor about entering a dark room, he advised caution in exploring how AI will influence the economy, stating, "You don't go charging in. You cautiously feel your way around."

Last year, Canada implemented a Voluntary Code of Conduct focused on the responsible development and management of advanced generative AI systems, outlining guidelines for companies involved in AI development.