Bank of Canada Governor Tiff Macklem recently warned that investment in artificial intelligence (AI) could lead to increased inflationary pressures in the short term and pose financial stability issues. He noted that AI could affect how businesses set prices, with companies that are more digital adjusting prices more frequently than those that are less digital.

“A key part of the central bank’s mandate is to monitor the impact of AI on inflation, both from the aggregate demand and supply side, as well as its direct pricing behavior,” Macklem said, noting that in the short term, AI could boost demand more than supply through faster productivity growth, leading to inflationary pressures.

Bank of Canada Governor Tiff Macklem Warns AI Could Fuel Inflation | Source: CBC News/YouTube

Risks to financial stability

Macklem also pointed out that the adoption of AI could pose risks to financial stability. Many banks and financial institutions are investing in AI to improve customer service and risk management, but this also poses operational risks, as problems can be concentrated among a few third-party service providers. He warned that AI’s predictive capabilities could be unexpectedly affected, with serious consequences during times of market volatility.

Impact on the labor market

Macklem argues that AI could significantly reduce the number of jobs that cannot be automated, making it difficult for workers to find new opportunities. While AI could replace low-productivity jobs, he also notes that negative impacts such as amplifying internet addiction and enabling toxic behavior could offset the positive effects of AI.

“As AI becomes more widespread and transformative, it could end up destroying more jobs than it creates,” he warned. This poses a major concern for society as workers struggle to adapt to the new labor market.

The Bank of Canada is currently using AI to forecast inflation and economic activity, monitor market sentiment, and improve operational efficiency. With the availability of large and detailed data sets, there is great potential to use AI to understand consumer and business behavior.

“We need to better understand how AI will affect productivity, employment, pricing behavior, and inflation. Despite many uncertainties, recent advances in AI, especially generative AI, have the potential to transform the global economy,” Macklem concluded.

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