The AI revolution is under way and it’s not just about ChatGPT writing emails faster or image generators producing ad campaigns overnight. Artificial intelligence is on track to become the most powerful deflationary force we’ve seen since the industrial revolution. AI is moving rapidly from new potential to infrastructure. As it progresses and becomes more integrated, it will drive down the cost of producing almost everything. Not just goods and services, but knowledge and even decision making itself. That will have massive implications for the economy and business, as well as investors in the future.
AI’s influence will be a persistent tailwind for productivity, removing inefficiencies from business models and supply chains in every sector. Design, engineering and testing can now happen in days instead of months. Manufacturing processes can optimise themselves in real time with minimal human oversight. Customer service can operate around the clock without the cost or fatigue of human staff. This is not a theory for the future. It is already happening in parts of the economy today. The longer-term effect is lower costs across the board, bringing prices down.
Historically, the deflationary pull of new technology has been masked by population growth, rising demand and loose monetary policy. But AI is arriving at a moment when many of the world’s major economies are entering demographic decline too. Japan has been living with it for decades. China’s population has already peaked and is set to shrink by hundreds of millions over the next 25 years. South Korea and much of Europe are heading the same way. What was once a demographic tailwind for growth is becoming a headwind. More than that, when falling demand in areas with declining populations meets rapidly falling costs, the deflationary impact will be magnified, creating the potential for a significant economic shock.
AI will affect all industries and skill levels, from blue collar manufacturing roles to white collar professional services, through to creative work. Its reach is so broad and so fast that its impact on prices will be more profound and more global than past innovations. In industries where AI commoditises operations, margins will be compressed as competition intensifies. But there will be areas where it not only reduces costs but opens entirely new markets, and the winners will achieve extraordinary growth. These will be the businesses that use AI to create products or services that were not previously possible, or that own unique data sets that AI models depend on.
This is where it starts to get tricky because reducing costs will translate into many job losses. We are at a point where almost everyone you talk to is starting to feel some concern about job security in the future because of AI. Either their own job or someone’s in their family. As exciting as the advancements in AI technology are for future productivity, it won’t be long before the psychological shift around job security is felt in the economy. This is not good news for an already weakening economy and job market. If fear around job security starts to become embedded in the economy, then we risk a self-fulfilling spiral downward to much higher unemployment as people slow their spending and businesses suffer. This will compound the actual impact of job losses as AI starts to scale up.
But deflation on its own is not inherently bad. For investors and business leaders, it will create a bifurcated world where incumbents with legacy cost structures are under constant pressure, while more agile operators with lower fixed costs thrive. The challenge will be working out the sectors where AI driven deflation destroys profitability and those where it fuels entirely new growth. Major technological shifts usually create more wealth over time than they destroy, but the distribution is uneven. The opportunity is in identifying where value will emerge as costs fall, whether that’s in platforms, data ownership, or in the service companies that evolve from and around them.
AI’s deflationary power will reshape the global economy in ways that are both exciting and uncomfortable. We’re entering an era where capital will matter more than labour, and adaptability more than scale. But its impact won’t unfold in isolation. In the decade ahead, while AI drives costs lower, we will also see demand growth slow as populations age and shrink. That convergence will be disruptive, redistributing wealth and changing the rules of competition. For investors, the winners will be those who understand that the world will be shaped almost as much by shifting demographics as by AI’s technological progress.
General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.