By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Joachim Nagel on Tuesday said the inflation effects of artificial intelligence were uncertain and warned that central banks should stay alert, arguing that while AI could lift productivity and ease some price pressures, it could also boost demand, power consumption and pricing risks.

Nagel, who heads the Deutsche Bundesbank, said in a speech in Rome that higher productivity from AI adoption could expand aggregate supply, lower firms’ costs and help ease labor shortages linked to demographic change. Over time, however, he said, AI could also raise income, investment needs, demand for intermediate inputs and electricity consumption.

“In the long run, AI-related productivity gains could help counter or at least dampen losses from the demographic decline in the working population,” he said. He also said AI could significantly raise output, consumption and investment.

At the same time, Nagel cautioned that any disinflationary effect was far from assured. “In this scenario, the AI effect may become initially inflationary,” he said, adding that “this uncertainty calls for particular vigilance.”

The Bundesbank chief also warned that AI could create financial-stability risks through supplier concentration, herding behavior, greater market correlation and cyber and operational vulnerabilities stemming from the use of similar models in critical processes. AI-supported lending models could make banks’ credit assessments more alike and amplify simultaneous pullbacks in lending in a downturn, he said.

Nagel also pointed to the possibility that AI could make pricing less competitive. He said there was evidence that AI algorithms could learn to charge excessive prices without communicating with one another.

Turning to Europe, Nagel said the region entered the AI era with important strengths but from a weaker position than the United States and, in several respects, China. Still, “Europe can move faster in terms of financing, scaling, infrastructure, skills, energy and market integration,” he argued.

AI deployment would depend not only on innovation and capital but on power supply, he stressed, noting delays to new data-center projects in Europe because of insufficient grid capacity, including in Frankfurt. Policymakers, he said, should help provide “more scale-up capital and more computing power.”