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Bank of Canada Governor Tiff Macklem has cautioned that the rise of artificial intelligence (AI) could result in short-term inflationary pressures and financial stability challenges. According to Macklem, AI may also influence how businesses adjust prices, as there is evidence that digitally intensive firms are more prone to frequent price changes than less digitally focused companies.
“Central banks must stay vigilant in monitoring how AI impacts inflation, both indirectly through shifts in demand and supply, and directly through price-setting behavior,” Macklem stated.
Central banks are particularly focused on managing price inflation, aiming to keep it low and stable. Macklem explained that while AI holds the potential to enhance productivity, it could lead to inflationary pressures in the near term by boosting demand more than it contributes to supply. “In the short run, AI adoption might spur inflation if it accelerates demand before fully augmenting supply,” he added.
Financial Stability Concerns
The Bank of Canada governor also highlighted potential financial stability risks associated with AI adoption. Financial institutions are increasingly integrating AI to improve services, enhance compliance, manage risks, and assess credit and liquidity more effectively, which is expected to improve efficiency and overall stability.
However, Macklem warned of significant challenges, particularly regarding operational risks. He pointed out that reliance on a limited number of third-party service providers could make the financial system vulnerable to disruptions. “A failure at one of these service providers could ripple through the entire financial system,” he warned.
Macklem also noted the unpredictability of AI’s performance, which can deteriorate unexpectedly or exhibit bias and discrimination. Additionally, the speed of AI could amplify market volatility, exacerbating sudden market shifts or herding behavior.
Impact on Jobs and Workforce
Beyond inflation and financial stability, AI’s impact on the labor market is another significant concern. Macklem acknowledged that while AI could eliminate lower-productivity jobs, it also frees up workers to take on more productive roles in the economy. However, the risk remains that AI might displace workers without creating enough new job opportunities.
“As AI becomes more widespread, there is a real possibility it could eliminate more jobs than it creates, leaving displaced workers struggling to find new opportunities,” Macklem said, emphasizing that this issue is a concern for everyone.
Macklem also addressed the potential downsides of AI, such as exacerbating internet addiction and enabling malicious activities, which could diminish the overall positive impact of the technology.
AI in the Bank of Canada
The Bank of Canada is already employing AI to improve its forecasting capabilities, including inflation predictions, economic activity tracking, and demand for banknotes. AI is also being used to clean and verify regulatory data, monitor sentiment in critical economic sectors, and improve operational efficiency.
With the availability of vast and highly detailed data sets, Macklem highlighted the potential for AI to revolutionize how businesses and consumers behave, particularly in how companies set their prices. While there is still much uncertainty about AI’s long-term effects, Macklem remains optimistic about its transformative potential.
“We need to deepen our understanding of AI’s impact on productivity, employment, price-setting behavior, and inflation. While this process will take time, using informed scenarios can help us navigate the uncertainties,” Macklem concluded.
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