Beyond chips, IMF warns AI wealth boom could fuel inflation risks

By Jorgelina do Rosario and Reade Pickert

 

Artificial intelligence may fuel inflation not just by driving up the cost of chips, but also by making consumers wealthier and more willing to spend, according to the International Monetary Fund’s chief economist. 

 

The AI investment boom is “generating tremendous valuations” for companies in US stock markets and in countries such as South Korea, creating a wealth effect that could add to price pressures, Pierre-Olivier Gourinchas said in an interview with Bloomberg News in Washington on Friday. 

 

Booming technology stocks are swelling retirement accounts and investment portfolios, leaving consumers feeling richer and more willing to spend on vacations, homes and other big-ticket purchases. “These demand pressures, they generate inflation,” said Gourinchas, who’s nearing the end of a four-year spell in charge of the fund’s economic research. 

 

There are “different channels from the AI component,” he said. “One very narrowly through the supply chain bottlenecks, and one through the demand side. Both of them are going the same direction.”

 

The wealth effect comes on top of AI-driven supply constraints already feeding into consumer inflation. Apple Inc. this week raised prices for a wide range of devices, citing the soaring cost of memory and storage triggered by demand from data centers. And Microsoft Corp. announced yet another price hike for Xbox consoles. 

 

The inflation debate has come full circle for Gourinchas, who’s due to leave his post next week and return to academia at the University of California, Berkeley. 

 

He arrived in the job at the start of 2022, shortly before Russia’s invasion of Ukraine. The conflict, combined with pandemic disruptions to economies worldwide, helped fuel the biggest price shock in decades. 

 

A key question now, given that recent history, is how the latest round of price increases will feed into inflation expectations. After several years of intense debates over the cost of living, households are likely to be more sensitive to sticker-shock. “The memory is fresh,” Gourinchas said. “Everyone remembers.”

 

Besides the impact of AI, his two other main concerns about the global outlook are continued uncertainty over energy flows due to the war in Iran, and the fiscal problems that many countries face as high debt levels combine with slower growth and steeper borrowing costs. 

 

“The appetite for raising revenues is close to zero in many places,” Gourinchas said. “So how do you solve that fiscal equation?”