Over The Long Term, Productivity Increases Lead To Lower Prices
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Editor’s note: Today, Distressed Investing analyst Andrew Lipman shares his insight on how, over the long term, the infusion of AI into all aspects of the economy will lead to great productivity and lower inflation.
Here’s Andy now…
AI can do many things – and it might even end high inflation…
But first we will see an increase in inflation, then as productivity increases with the expansion of artificial intelligence (“AI”) throughout the economy, inflation will fall over the longer term.
Three economic points underlay this theme:
If the supply of something is constant, increasing demand for it leads to higher prices (price inflation) and declining demand leads to lower prices (price deflation)
If the demand for something is constant, rising supply of it leads to lower prices (deflation) and reducing its supply leads to higher prices (inflation)
Productivity means getting more output from the same amount of input – which for any product or service is a particular mix of labor and investment capital
The investment bank Goldman Sachs estimates that between $5.5 trillion and $7.6 trillion will be invested in AI infrastructure between 2026 and 2030. Such large expenditures will no doubt lead to a period of “demand pull” inflation – when demand for goods and services required to complete the buildout outpaces supply.
First, There Will Be Short-Term Inflation
According to McKinsey & Co., it takes three to five years to add a new semiconductor production facility. Which means the current phase of the AI investment boom – building data centers fitted out with computing, storage, and cooling systems – is projected to last through 2030. Spending $1 trillion per year will increase demand for these build-out products faster than supply – the chipmakers and power providers cannot deliver what’s needed as fast as it is needed.
This mismatch of demand and supply is leading to price inflation, particularly due to demand for memory and flash-storage semiconductors. The demand has outstripped supply and caused prices to ratchet higher. It has given rise to a new word: memflation.
Higher semiconductor prices, in turn, lead to higher prices for consumer electronics. Virtually every new appliance has processing and memory chips embedded – affecting even the simplest things like pre-programmed settings on a microwave oven or a dishwasher and therefore the everyday consumer.
Software prices have also been surging. This is partly attributable to semiconductor chip prices, as well as the indirect cost of adapting programs to incorporate AI.
