Inflation has eased from last year’s peak, but as recent figures show, it’s not as low as everyone would like. The Federal Reserve has done its part by raising interest rates 11 times, keeping them at a 23-year high. Is that enough? Probably, but some economists say global trends have ushered in a new era of even higher inflation.
Costs are rising due to a variety of factors, including onshoring and nearshoring efforts, whether permanent or temporary, ongoing trade tensions with China, the shift to green energy, a tight labor force, rising wages, and rising health care costs due to an aging population. The current predicament shows that society needs different ways to combat rising costs.
Artificial intelligence (AI) may be the answer. Technology has acted as an inflation-fighting force before — the microchip is a good example. Today, in a world where inflationary shocks are the new normal, AI could act as an inflation-fighting counterweight.
Back to the Future? Not this time
For most of the last 25 years, inflation has been kept low by increasing productivity — and I’m not just talking about labor productivity, I’m talking about output — for every dollar put in, there’s more output, and a lot of that has been offshoring.
Reliance on cheap manufacturing capacity in countries like China, Vietnam and India has been a key lever available to Western companies, but that is coming to an abrupt end. Over the next 20-30 years, most inputs will be inflationary, and the only real weapon to combat this is AI.
In some ways, the recession is already here: From 2012 to 2019, average annual U.S. productivity fell below 1% due to an overall decline in net investment as a share of GDP, a slowdown in the offshoring of manufacturing and services, and diminishing gains from automation as many of the earlier easy opportunities were taken.
Going forward, companies will have little choice but to turn to AI and GenAI to improve productivity, and in the long term, this may be their only, or at least best, solution.
Even before GenAI became widespread, predictions about its impact on productivity were optimistic. McKinsey believes AI could boost corporate profits by $4.4 trillion a year (for comparison, the UK’s GDP is $3 trillion). And Nielsen thinks GenAI could boost labor productivity by 66%. But no one really knows. These estimates aren’t as important as what AI can achieve in certain industries, where performance will vary.
Productivity gains appear to be correlated with the level of digitalisation achieved in each industry, with sectors such as transport and logistics and agriculture seeing less productivity gains than sectors such as retail, technology, media and professional services.
10 years of AI
Many businesses are beginning to realize the benefits of AI. AI is not meant to replace human judgement, but to help ease the heavy cognitive load on humans so they can work better, smarter and more efficiently. The idea is to bring humans back into the loop and accelerate the ability to test and learn with data-driven decision making.
Our industry has been using AI for almost a decade, from delivering seamless end-to-end efficiencies in supply chains and logistics to managing networks more efficiently through automation. Examples abound, including applying AI to build networks and planning optimal 5G coverage. And in customer service, AI is empowering employees to spend less time searching for information and more time on personalized interactions, resolving customer issues, and fine-tuning service offers.
More broadly, AI is revolutionizing the healthcare industry with advances in diagnostic imaging and the development of new treatments. In real estate, AI is improving response times to listing inquiries and supporting sales. In the investment industry, AI is opening new research avenues for improved analytics. These efficiencies, along with the networks and more advanced computing that enable them, will drive America’s productivity growth for the next 20 to 30 years. AI is making all this possible, but doing it right will be society’s key challenge.
A long and exciting journey
While many of the efficiency benefits of AI are evident today, we are still far from realizing its full potential. I have never seen such a wide gap between technology and adoption. The technology already available is incredibly sophisticated, especially when it comes to GenAI. And adoption will take time. Consider electric cars. They have been around since the 1800s, but have only recently started to enter the mass market.
There is a lot of work to be done. For example, most of the value of AI lies in specialized datasets for vertical models that don’t exist today or are still being built. This is a widespread problem for large enterprises that ingest billions of bits of data every day. Building a single platform in a privacy-preserving and data-intelligent way is no easy feat.
But change is afoot: companies that begin their AI journey now, or have already begun, will be in a strong position to drive the productivity gains that are key to a low-inflation environment for the next 20 years.
See more must-read articles luck:
Opinions expressed in Fortune.com editorials are solely those of the authors and do not necessarily represent the views of luck.
