The artificial intelligence boom could make it significantly harder for central banks to judge the state of the economy and set interest rates, according to Bank for International Settlements (BIS) economists. The rapid expansion of AI technology raises risks of monetary policy mistakes as traditional indicators become less reliable.
By simultaneously affecting demand and supply, AI blurs cyclical signals
The current surge in AI spending, increasingly financed by debt, is driving up economic activity, trade, and equity markets, adding to near-term inflationary pressures. One immediate risk is misreading strong growth driven by AI investment as an overheating economy.
AI could eventually increase productivity and capacity, expanding supply and containing inflation, but the size, timing, and distribution of those gains remain highly uncertain. Productivity gains could mask underlying demand pressures, making inflation trends harder to interpret.
AI-related optimism has driven rapid equity market gains, creating wealth effects and raising the risk of asset price bubbles. The BIS highlighted uneven impact of AI across countries and for labour markets. AI effects differ across sectors, complicating the assessment of underlying trends.
AI is likely to have varied economic effects on unobservable variables like the natural rates of interest and unemployment. Central banks must make real-time decisions on what direction the AI boom is shifting key economic variables to avoid policy miscalibration.
Federal Reserve response
US Federal Reserve Chairman Kevin Warsh has formed task forces focused on AI impact on labour market and productivity, inflation measurement and economic data collection. The conclusions and recommendations of the Fed task forces are due by year-end.
The BIS bulletin outlining these concerns was written by economists Iñaki Aldasoro, Leonardo Gambacorta, Enisse Kharroubi and Matthias Rottner.