AI Could Be Inflation’s Achilles’ Heel

AI Could Be Inflation’s Achilles’ Heel
Jonathan Hobbs

10 months ago2 mins

Any good economist will tell you that higher business costs can cause “cost-push inflation”. It's when companies are forced to spend more money to produce their products and services – making them more likely to hoist prices to keep their profit margins intact. Since AI is likely to make those costs cheaper, it could slow inflation in a big way.

This chart from Cathie Wood’s ARK Invest compares the time taken for a human software engineer and one helped by an AI coding assistant (called Github Copilot), to complete a coding task on GitHub last year. When an engineer used the AI assistant, it took less than half the time. Now consider that AI gets exponentially smarter each day, and then imagine just how fast (and scary) this could get in the future.

As for the price implications: according to ARK research, AI can now create a graphic design for just $0.08 in less than a minute – compared to the $150 or more you might pay a human designer for five hours to do the same thing. What’s more, the cost to train AI programs is also dropping like a stone. Two years ago a company would’ve had to fork out $4.6 million to train an AI language model to ChatGPT levels, according to MosaicML. Today, it’d cost about one-tenth of that. So not only is AI going to make things cheaper, but it’s also going to become cheaper for companies to implement world-class AI.

If you think AI will keep inflation down, there’s a contrarian way to play this: buying the iShares 20+ Year Treasury Bond ETF (ticker: TLT; expense ratio: 0.15%). “Long-duration” bonds tend to do better when investors expect inflation to be lower for longer, as their future cash flows could have more value at current prices. They can also do better than short-duration bonds if we get a recession without inflation, as they’re more sensitive to falling interest rates. So on that front, they could provide diversification benefits too.



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