Central bankers' uncertainty has eased investor fears but AI's potential to boost economies contrasts with short-term inflationary risks. l Source: Chip Somodevilla/Getty Images
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Key Takeaways
Investor fears have increased as central bankers grapple with uncertain times.
Artificial intelligence can be both a friend and a foe to central bankers.
If not properly addressed, algorithmic biases could lead to bizarre outcomes.
Inflation and monetary policy remain central to financial markets, but central bankers‘ uncertainty has eased investor fears. This happened in particular during uncertain times, like the Covid-19 pandemic and the war in Ukraine.
Artificial intelligence (AI), with its long-term effects on productivity and short-term effects on infrastructure investment, represents a new force that will profoundly transform the economy while presenting risks and opportunities.
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AI’s Role in Inflation Control and Economic Growth
Inflation and monetary policy have long dominated financial markets, but investor anxiety over central bankers‘ announcements has eased. This shift is partly because central bankers themselves are uncertain about future inflation trends and base their policies on known data, just as investors do. For long-term investors, slight monthly variations in inflation are largely irrelevant.
Bert Flossbach, asset manager Flossbach von Storch’s co-founder, told CCN: “The impact of AI on inflation remains unclear. In the long term, AI-driven productivity gains could boost economic growth and reduce inflation. However, short- to medium-term effects may include inflationary pressures due to substantial investments in AI infrastructure and high electricity consumption.
“AI’s rise has far-reaching implications, similar to the internet’s transformative impact. AI will revolutionize sectors such as research and development, production, consumption, communication, education, and security, having already begun to reshape these areas through machine learning and advanced software.”
Bepi Pezzulli, financial expert and director of research at Italia Atlantica, commented: “By leveraging vast amounts of data and advanced algorithms, AI can provide real-time insights into economic trends, enabling more precise and timely interventions.”
“Unlike traditional methods that rely on historical data and often involve a lag in response, AI systems can analyze current market conditions, consumer behavior, and global economic indicators to predict inflationary trends more accurately.”
Pezzulli further notes that one key advantage of AI is its ability to process and interpret complex datasets far beyond human capability. “AI can analyze social media sentiment, retail sales data, and supply chain disruptions to gauge economic activity levels and predict potential inflationary pressures. This granular analysis allows for more targeted policy measures, such as adjusting interest rates or implementing fiscal policies to maintain price stability and promote sustainable economic growth.”
Can AI Outperform Central Bankers in Crisis Management?
AI may help bankers navigate challenging times, but it isn’t clear the extent to which inflation will also be affected by AI.
Flossbach believes that, in the long term, an increase in productivity may happen. This could not only increase economic growth but also reduce inflation. In the short to medium term, however, huge investments in artificial intelligence infrastructure and high electricity consumption could have an inflationary effect.”
For Pezzulli, on the other hand, AI can be a central banker’s best friend. “In crisis situations AI systems can simulate various scenarios. It can also assess the potential impacts of different policy measures and recommend the most effective course of action. This capability could enable central banks to respond more swiftly and effectively to emerging threats, minimizing economic damage and restoring stability.
“Additionally, AI can enhance the accuracy of economic forecasts, reducing the uncertainty that often hampers decision-making during crises. By continuously learning from new data and adjusting its models, AI can provide more reliable predictions and help central banks stay ahead of the curve.”
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Ethics of Integrating AI into Financial Systems
Computing power has surged dramatically. As an example, OpenAI’s release of ChatGPT 3.5 to the public in late 2022 was followed by the impressive ChatGPT 4.0 a year later. While these generative AI models offer remarkable capabilities, they also pose risks, according to Flossbach.
“Users can create manipulated images, videos, or texts that undermine public figures, influence opinions, and impact elections. Although ChatGPT’s guidelines prohibit such misuse, other AI models may not. Additionally, AI can create new opportunities. But it may also disrupt existing industries and potentially fuel harmful developments, such as uncontrolled virus growth.
“The future impact of these risks remains uncertain. Early internet concerns about cyberattacks and data theft proved valid, but the world adapted with new defenses. Similarly, as AI evolves, it will bring uncertainties, with some companies thriving while others falter.”
Pezzulli thinks one of the primary concerns is the potential for algorithmic bias. “This can result from biased training data or flawed model design. If not properly addressed, such biases could lead to bizarre outcomes, creating distorted financial systems in order to achieve egalitarian social goals.
“AI systems, particularly those based on complex machine learning models, often operate as “black boxes,” making it difficult to understand how they arrive at specific recommendations. This lack of transparency can hinder accountability and make it challenging to assess the validity of AI-driven decisions,” he concluded.
