How AI could be the solution to inflation
- maanarha2024
- Aug 3
- 3 min read
London, ON
Artificial intelligence is a rapidly evolving technology which affects all aspects of our society. Many are uncertain about how it will affect their future, whether it will replace jobs, create them, advance modern medicine, or make transportation safer. The reality is that it is a powerful new technology that can be implemented to solve many problems if used adequately. One of the biggest economic problems that is being faced in many of the world's countries is inflation. There can be a correlation made between the implementation of AI into the economy and the reduction of inflation, although it begs the question on whether this reduction of inflation is sustainable and how this might impact the different groups in an economy.
A simple way to explain economic inflation is the increase in price of different goods and services over a period of time. There are two common types of inflation: demand-pull inflation and cost-push inflation. Demand-pull inflation happens when the population demands more goods than there are currently in the economy. This is a common consequence of people having more money to spend, or more disposable income, such as if wages increase or interest rates fall. Cost-push inflation is a result of higher costs of production or of raw materials, such as higher wages or high oil prices, which in turn makes it more expensive to produce goods. It is healthy for an economy to have a small degree of inflation, since this can help to grow the economy in a stable way. However, a large percentage of inflation brings a lot of negative consequences: the cost of living rises, increasing wages lead to higher unemployment rates, economic growth slows down, and economic inequality increases.
AI is a tool that could be applied broadly throughout different industries, as it is able to automate many tasks that previously required labor. This means that it can increase the output of a firm without them needing as many workers. This makes it cheaper for firms to produce a higher amount of goods, since they do not need to pay more wages to people. If an economy is facing cost-push inflation, the reduction of the cost of production significantly decreases said inflationary pressure. There is also a possibility of demand-pull inflation being reduced as well, when people lose their jobs they possess less disposable income and consume fewer goods.
On the other hand, some argue that the use of AI could lead to even more inflationary pressures due to firms needing to invest high amounts of money into this new technology. This significantly increases the demand for the needed resources.
Although the implementation of AI may have its benefits, there are also many negative consequences. The most notable drawback is its effect on employment, as the implementation of AI may cause people to lose their previous jobs. An argument can be made that jobs could also be created. However, there is a risk of the labor force having mismatched skills and the jobs taking a long time to be created. High levels of unemployment harm the economy, as well as the individuals. Income inequality can increase, people will not be able to afford a good quality of life, and many might not have money to put into the economy. There is also a possible risk of reaching a recession due to high amounts of deflation if the inflation reduces at a fast pace in which demand cannot keep up. It may be the case that consumption will not compare to the new level of output if jobs are not created at a fast enough rate and the efficiency of AI greatly outweighs its cost. On the other hand, AI may not affect inflation if the firm’s investments are greater than the higher supply of goods, and therefore inflation will remain.
It is very difficult to draw a conclusion about AI’s influence on inflation and the labor market. There is generally much uncertainty surrounding AI, but the implementation of it is inevitable. Just like any economic policy it has advantages and consequences; however, it is important for firms to take an appropriate approach to this new technology. Since there is not much research conducted on this topic, much is left to educated guesses and speculation.
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