Bank of Canada: AI could cause inflation

Usually, new technology makes things cheaper. In theory, new technology creates efficiency, which lowers prices. But according to the Bank of Canada, artificial intelligence (AI) can actually cause inflation. How does that work?

Inflation by AI?

Inflation can cause inflation, especially in the short term, according to Tiff Macklem of the Bank of Canada. So much so that he worries about financial stability as a result of the rise of technology.

How exactly that works is not entirely clear, but Macklem is probably worried about the huge investments in computer power to run AI models. That requires a lot of equipment and due to scarcity, prices can rise.

The problem is that AI is not yet providing extreme changes/improvements in society. We see the first contours of a future with artificial intelligence, but the real breakthrough for the masses has yet to come.

“Central banks need to keep a close eye on how AI drives inflation, both indirectly through supply and demand, but also directly by determining prices,” Macklem said.

What does this mean for Bitcoin?

If Macklem is right, it could be bullish for Bitcoin in the short term, as inflation means people will look for alternative assets to protect their wealth.

Bitcoin could be a potential endpoint of that search. Of course not the ultimate endpoint, because some people will also choose other assets, but if inflation remains high in the coming years, people will increasingly look for alternatives.

Another problem with AI is that it could result in the loss of many jobs, according to Macklem. But that is a concern we hear about any new technology.

Ultimately, however, it turns out – almost every time so far – that new technology also creates new jobs.