Bank of Canada Governor warns: Artificial intelligence may exacerbate price pressures in the short term.

Canadian central bank Governor Tiff Macklem has warned that artificial intelligence technology could exacerbate inflation pressures, price and labor volatility in the short term. Tiff Macklem stated on Friday in a speech that the strong investments in artificial intelligence, driven by rising stock prices and increased hiring consuming, are boosting demand, and the massive computing requirements of this technology are causing a surge in electricity demand; if these demands exceed the expansion of production capacity, the result could be faster price growth. Tiff Macklem said, "Artificial intelligence can boost demand through faster productivity growth, rather than increasing supply. If this happens, the adoption of artificial intelligence could increase inflation pressure in the short term." However, he added that in the long term, the productivity improvements brought about by adopting artificial intelligence will increase supply, raise potential growth, and result in wage increases for workers and spending without pushing inflation higher. He said, "In the long term, we can expect artificial intelligence to increase productivity. Higher productivity will allow for higher wages and more spending, without pushing up inflation." Tiff 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 this year. Tiff Macklem's latest comments suggest that despite the Bank of Canada being in a easing cycle, they are still concerned about potential upside risks to inflation. Since June, the Bank of Canada has cut interest rates three times, bringing the benchmark rate to 4.25%, while hinting at further cuts. Market expectations currently suggest a 50% chance of a 50-basis-point rate cut at the next meeting on October 23. Tiff Macklem also warned in his speech that artificial intelligence could increase volatility, as it affects companies' pricing behavior, with evidence showing that digital-intensive companies change prices more frequently than other companies. He said, "Assuming no impact on competition among firms, this suggests the Phillips curve may be steeper than previously thought. This indicates that inflation may be more volatile than in the 25 years before the pandemic, especially in a more easily affected world." Furthermore, Tiff Macklem stated that there is little evidence currently to suggest that artificial intelligence is replacing jobs, and that the digitalization and commercialization of these technologies "may be net job creators for Canada." However, even as labor demand may increase, the faster adoption of artificial intelligence could disrupt the labor market. Tiff Macklem said, "In past cycles of transformation, the diffusion of technology took a long time, allowing the labor market time to adjust. But this time, the adoption speed could be faster, causing more disruptions and unreplaceable livelihood losses."