📈 What would be the impact of an AI boom on interest rates and inflation?

Also: 5 Quick Questions for … Rob Atkinson on the CHIPS and Science Act, industrial policy, and AI

Quote of the Issue

"I've always thought of AI as the most profound technology humanity is working on—more profound than fire or electricity or anything that we've done in the past." - Sundar Pichai, CEO of Alphabet

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The Essay

📈 What would be the impact of AI boom on interest rates and inflation?

Recent data have made the potential impact of artificial intelligence on productivity and economic growth even more relevant. US labor productivity — or output per hour worked at nonfarm businesses — fell at an annual rate of 2.1 percent in the first quarter vs. the fourth, and was down 0.8 percent in the first quarter from a year earlier. That made it five straight quarters of negative year-over-year productivity growth, the longest such losing streak since records began in 1948. Not a good sign for the long-term growth of US living standards.

But hopefully AI to the rescue, right? Generative AI, specifically, could boost productivity and economic output through two main channels. First, by making cognitive or knowledge workers more efficient, GenAI would directly increase output. If GenAI made cognitive workers, say, 30 percent more productive over the next decade or so and cognitive work is 60 percent of the economy, this would translate into an 18 percent aggregate productivity increase, a recent Brookings report calculates. (Early days on all these estimates, of course, based on experiments, models, and a few real world observations.)

Second, and more significantly, if cognitive workers are more efficient at innovation, they will be able to invent new things and discover new ways of doing things, which will lead to faster productivity growth in the future. Brookings:

If cognitive workers are more efficient, they will accelerate technological progress and thereby boost the rate of productivity growth—in perpetuity. For example, if productivity growth was 2% and the cognitive labor that underpins productivity growth is 20% more productive, this would raise the growth rate of productivity by 20% to 2.4%. In a given year, such a change is barely noticeable and is usually swamped by cyclical fluctuations.

So let’s assume AI does lead to faster productivity growth, what might be the impact on two other pretty important economic factors, interest rates and inflation? A new report from JPMorgan looks at that issue.