As the Federal Reserve continues tightening its monetary policy, with another quarter point rate hike expected on May 3, it's time to ask whether the central bank has peered further out to see if deflation — not inflation — is the next economic condition that's approaching.
With the advent of generative artificial intelligence, one could make the case that this short burst of post-pandemic inflation will soon be eclipsed by deflationary forces fostered by the rapid adoption of AI.
The rapid adoption of AI tools — like ChatGPT, machine learning, natural language processing programs and the deployment of robots to handle human chores — inflationary pressures, particularly in labor markets, may evaporate far more quickly than currently assumed.
We can save the apocalyptic concerns of an emerging Skynet moment for another day which, if it occurs, renders all inflation and deflation concerns moot.
People who are better informed than I am are debating those risks as I write.
From an economic perspective, however, AI and all of its associated tools are wildly deflationary.
AI as a deflationary force
AI is rapidly being adopted by businesses. According to estimates by Goldman Sachs, it may reduce the global need for labor by some 300 million jobs.
It's true that with every technological advancement, workers are displaced and costs for specific goods and services decline as a consequence.
This has been true since the invention of the wheel, the plow and the internet. Of course, more jobs in each new industrial or information revolution have been created, as well.
But generative AI may be different: It rapidly becomes a ubiquitous force in the workplace. For starters, it affects coding — currently a high-paying job — even as other aspects of a new technological revolution replace humans with robots in everything from advanced manufacturing to quick service dining.
I'm not saying much new here with respect to the conventional wisdom about what AI will do to the future of the labor force, other than to add that inflation could fall quickly and sharply as these new tools are rolled out. This was the case in the 1990s.
A lesson from the 1990s
The Fed of the 1990s, under Alan Greenspan, witnessed the persistence of lower-than-expected inflation as the internet age came into being.
Indeed, the Fed allowed interest rates to stay lower for longer back then. The central bank took that approach despite very rapid economic growth and hefty job creation, as it watched the prices for goods and services remain quiescent, defying the Phillips curve orthodoxy that was long accepted as gospel among economists of the time.
The Phillips curve suggests that inflation accelerates more rapidly as labor markets reach full employment and as competition for scarce workers drives wages higher. It's an argument the Fed is once more making today.
Whether that holds true in yet another wave of rapid technological advancement remains to be seen.
Post-pandemic inflation remains elevated, relative to recent history, but is down sharply from its peak rate.
As the U.S. and global economies continue to normalize, AI could be an accelerant in driving down inflation, leading to 1990s-style disinflation, or an extended burst of outright deflation.
The cost of a robot, for instance, has plunged and will likely fall by another 50% in the next few years, making robots cheaper than humans in logistics jobs. This would lead not only to greater efficiencies but also lower costs for end users of manufactured goods.
Even service jobs may be affected, pushing down inflation that remains stubbornly high in that huge sector of the economy.
A change to the Fed's view on the economy?
The 1990s may look relatively inflationary when compared to the decade ahead, when AI either assists workers or eliminates them entirely, making even some creative jobs entirely obsolete.
Yes, there are downsides to an idle workforce. New means of support, like a universal basic income, might be required to assist those thrown off the job.
That, too, would be deflationary as government compensation would not likely rise to the level of current wages.
All of these debates around AI will rage on for years.
However, with respect to the overall impact on the economy, is the central bank prepared to alter its stance on interest-rate policy with a more forward-looking view of what's likely to happen in the relative near term?
For now, it is setting policy by continuing to look into the rearview mirror to avoid the mistakes of 50 years ago.
It won't take 50 years for a new set of economic realities to change the course of inflation that is largely the product of dual shocks to the economy that have already largely run their course.
— Ron Insana is a CNBC contributor and a senior advisor at Schroders.