FT: Investors underestimate AI’s potential to cause deflation

The Financial Times has published a stark economic analysis warning that financial markets and investors are significantly underestimating the potential for artificial intelligence, particularly generative and agentic AI, to drive deflationary pressures. The core argument centers on timing: AI technologies capable of substituting human labor (agentic AI) and enhancing productivity (generative AI) may first suppress wage growth and labor demand before their full productivity benefits are realized. This creates a scenario where inflation risks are skewed decisively lower than current market pricing reflects, as the traditional link between technology, wages, and prices undergoes a new stress test.

The analysis highlights two sequential phases. Initially, AI could act as a negative shock to aggregate demand by softening labor markets, a risk not fully priced into current inflation compensation metrics. Subsequently, as adoption matures, AI should transition into a powerful positive productivity shock, which is inherently disinflationary in the medium term. This more optimistic productivity-driven outcome is presented as more compelling than purely dire demand-side forecasts. The implication for professionals is clear: macroeconomic models and investment theses must urgently factor in AI's non-linear impact on wages, productivity, and inflation, challenging conventional economic wisdom about technological adoption cycles.