AI disruption, wage deflation, research abundance

Jonathan Hill of Barclays argues that while markets focus on near-term geopolitical risks, the consensus is shifting toward pre-COVID US core inflation dynamics. However, overlaying the increasing probability of labor market disruption from generative and agentic AI suggests that markets should price a *negative* core inflation risk premium beyond the near term. Pre-COVID, core inflation was anchored by flat goods inflation, 3.0-3.5% rent inflation, and 2% core services ex-rents. With rents expected to be softer and goods returning to flat, the bar for supercore inflation is higher, yet wage growth is already decelerating to pre-COVID paces. The rapid improvement in AI capabilities suggests substitution of workflows, not just tasks, which could soften labor demand before productivity fully lifts, skewing inflation risk lower. If markets internalize this AI-disinflation scenario, the repricing of inflation risk premia could lead to a rally in nominal yields, compressed real yields, and a steepening of the curve. The author notes that this analysis piece itself was largely drafted by AI.

(Source：Ft)