How will AI affect the economy?

Artificial intelligence could improve efficiency and productivity... but it could also create new risks

Artificial intelligence is developing rapidly and is likely to change the economy and labour market in major ways.

Whilst older technology was mainly used for simple, repetitive tasks, machine learning and generative AI can handle more complex ones such as working with written or spoken language. This could help people work more efficiently – but it could also replace some jobs.

These advances in AI systems have increased both the potential benefits and the potential risks associated with the technology. The Bank of England is monitoring this closely as part of our responsibilities for monetary and financial stability. 

How could it affect banks and the financial system?

Banks and other financial firms are already using AI to support a variety of activities, including:

  • customer support chatbots
  • fraud detection and security monitoring
  • identifying potentially suspicious transactions
  • compliance processes
  • internal research and analysis
  • software development and coding support

Used well, AI could help financial firms (eg banks and insurance companies) provide better services, improve efficiency and support innovation. Some are also exploring more advanced uses, such as virtual AI 'assistants' that can produce analysis and give personalised advice.

However, it could also introduce new risks. As AI systems become more powerful, financial firms may become increasingly dependent on a small number of AI and technology providers.

If many firms rely on the same services, disruptions, cyber incidents or operational failures could have wider effects across the financial system. The Financial Policy Committee (FPC) has noticed an increase in risks related to cyber security and operational resilience (the ability of the financial sector to prevent, adapt, respond to, recover from and learn from disruptions).

The FPC is also keeping an eye on how investors and financial markets are responding to expectations of AI. Significant investment is flowing into AI-related companies and infrastructure, but there is still uncertainty about the scale of future profits and how much productivity will increase. Changes in investor expectations could affect asset prices and financial stability.  

Could it boost economic growth?

One reason AI has attracted so much attention is its potential to improve productivity.

Productivity is, put simply, how much you get done with what you have. If workers can complete tasks more quickly, businesses may be able to produce more goods and services without using more resources, eg hiring more people.

Many experts believe AI could:

  • help workers complete routine tasks faster
  • support innovation and the creation of new products and services
  • improve how businesses use their time and resources
  • encourage investment in new technologies

If this happens on a large scale, AI could contribute to stronger economic growth and improved living standards. Firms surveyed by the Bank report small productivity gains from AI so far but expect these to increase.

However, there is significant uncertainty about how quickly these benefits will take effect. The future economic impact of AI depends on things such as how widely it is adopted, whether businesses can use it to make a profit and whether the infrastructure needed to support it can be developed at the scale needed for it to be effective. 

How could it affect inflation?

The relationship between AI and inflation is not straightforward.

If it helps businesses become more productive and reduces costs, some goods and services could become cheaper to produce. This could mean businesses are less likely to raise their prices.

However, developing and deploying advanced AI requires substantial investment in technology, data centres, energy infrastructure and skilled workers. This increased demand could push prices up in these sectors.

AI could also change how businesses set their prices. Some firms are using algorithms to adjust them more frequently in response to supply and demand, or to offer different prices to different customers. So far, there is no clear evidence that this is leading to consistently higher or lower inflation. Their future impact is likely to depend on things such as the strength of competition and how much information businesses and consumers have.

The overall effect on inflation is, therefore, uncertain. It will depend on how AI develops, how widely it is adopted, and how businesses and consumers respond. We are monitoring these trends closely because changes in inflation can affect the decisions we make about monetary policy, including interest rates.  

Why is the Bank monitoring this?

Central banks have a responsibility to safeguard the stability of the financial system as a whole and we have identified AI as an emerging issue. While AI could support growth and innovation, it may also create new vulnerabilities, including cyber risks, operational disruptions and increased reliance on a small number of technology providers. We know we need to engage with this early, before the risks become more difficult to contain.

So, we must keep an eye on how AI is affecting the economy to help make sure that households and businesses continue to benefit from a stable and resilient financial system.

 

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