The term AI (artificial intelligence) Has become one of the most searched for terms in Google searches globally over the past 12 months. This general increase in interest in AI can be traced back to January this year when Microsoft announced a $10bn investment in to ChatGPT, a tool that allows us to have human-like conversations with a ‘chatbot’. 

In reality, companies have been using technological advances over the past 50 years to improve the products and services they offer as well as streamline their processes. In our view, however, the progress being made in generative AI could well have an impact on our behaviours as individuals and companies alike on a scale not experienced since the mass adoption of the internet in preceding decades.

At Tacit our thinking on the potential uses and the consequential impact of AI is evolving, and we consider that anybody who professes that they know how the progress in AI will impact economies, companies, and individuals in the short, medium and long term with any certainty is foolhardy. There are many variables to how this technology will develop and will be used. For example, companies could use AI to reduce workforces or to increase the productivity of current employees, and either strategy would aim to enhance profitability. 

Artificial Intelligence may have both inflationary and deflationary effects on the economy. We know from the Industrial Revolution that while total wealth might increase, industrial and technological change creates winners and losers. 

What about the impact on the future price level, the rate of inflation? Currently the major economic problem facing us. Commentary to date has focussed on the deflationary impact of the emergence of AI. Deflationary effects could include:

Labour Displacement: AI and automation can lead to job displacement in certain industries. When tasks that were previously performed by humans are automated, it can reduce the demand for human labour, leading to unemployment or underemployment, which can contribute to deflationary pressures.

Reduced Costs: AI can lead to cost reductions in various industries by streamlining processes, optimizing supply chains, and improving efficiency. This can lead to lower prices for goods and services, contributing to deflationary pressures.

Productivity Increases: AI can enhance productivity by enabling faster and more accurate decision-making and data analysis. This increased productivity can lead to more output without a corresponding increase in labour, potentially contributing to deflation.

On the other hand, inflationary effects cannot be discounted and include:

New opportunities: While AI might displace some jobs, it can also create new opportunities in AI development, maintenance, and related fields. The demand for skilled AI professionals could lead to higher wages and increased consumer spending, contributing to inflation.

Higher quality products: AI can lead to the creation of higher quality and more sophisticated products and services, which could command higher prices in the market and contribute to inflation.

Resource constraints: As technology advances, it might increase demand for certain resources like specialised hardware components, leading to potential supply shortages and price increases.

The net effect of AI on inflation rates will depend on various factors, including the rate of adoption, the sectors affected, government policies, and the overall economic environment. It’s important to note that the impact of AI on the economy is complex and multifaceted, and its effects can vary over time as technology and economies evolve. 

Our hunch is that this technology will be disinflationary over time however supply constraints for components in the short term could lead to a form of arms race between regions which will only increase the existing tensions between the West and the command economies of the East where many of the minerals fundamental to this transformation are found.

In the coming weeks we will write in more detail about this topic from the perspective of how companies can adopt and adapt to this new technological development to enhance their businesses, and how governments may look to regulate this nascent industry to limit social and political discord.