Last week, we discussed some of the reasons interest rates are likely to move higher in the near term and remain elevated over the longer term relative to rates experienced from 2000 to 2020—in particular, that the inflation regime has changed. We also contended that the previous low-inflation regime was the result of an extraordinarily lucky confluence of factors, including: globalization, demographics, the rise of China, the opening up of the former Soviet Union, innovation, fiscal conservatism, and the reduction in labor’s bargaining power.
Those factors have all now changed; they are either no longer contributing the same amount of disinflationary pressure or they are raising inflation, in addition to other factors that are also now raising inflationary pressures. The main pushback to this narrative is that we are on the cusp of a massively disinflationary AI boom, one that will result in interest rates coming right back down over the longer term. Hence, in this Economics Weekly, Richard de Chazal discusses why this benign narrative might not be that simple and how we should really be thinking about the disinflationary impact of AI.