AI and Inflation

Key Insights for Investors from Recent EU Research

The rapid development of artificial intelligence (AI) is widely viewed as a positive supply-side shock that increases productivity and reduces inflation. However, there remains substantial uncertainty surrounding the magnitude of the productivity gains associated with AI adoption. Jakub Borowski, Jarko Fidrmuc, and Krystian Jaworski, authors of the study “Artificial intelligence and inflation in the EU,” published in the December 2025 issue of Economic Letters, shed light on how artificial intelligence adoption is influencing inflation patterns across the European Union, offering important implications for investment strategy.

What the Researchers Examined

The authors investigated a critical question facing policymakers and market participants: How does the adoption of artificial intelligence technology affect producer price inflation across different economic sectors in the European Union?

Using a novel dataset from Eurostat on AI usage in both manufacturing and services sectors in 2024, the research team analyzed the sectoral impact of AI adoption on inflation dynamics across 24 EU countries. This represents one of the first empirical examinations of AI’s deflationary effects using comprehensive, sector-specific data.

Key Findings

The study reveals several important insights about AI’s economic impact:

1. AI Adoption Reduces Inflationary Pressures

The research demonstrates that increased AI diffusion is associated with lower producer price inflation—a 10–percentage-point increase in the share of firms employing AI corresponds, on average, to a 0.3-0.6 percentage-point decline in inflation. This effect, while modest, is statistically significant and economically meaningful for understanding future price dynamics.

2. Services Sector Shows Strongest Effects

The deflationary impact of AI is most pronounced in the services sector, suggesting that service industries may be experiencing greater productivity gains from AI implementation than manufacturing sectors. This finding is particularly relevant given that services account for about 66% of GDP in the EU.

3. Eurozone Experiences More Significant Effects

Within the broader EU, Eurozone countries show more statistically significant inflation reduction from AI adoption, potentially reflecting differences in technological diffusion rates, industrial structure, or monetary policy frameworks across the currency union. In some Eastern European service sectors, less than 5 % of firms use AI, while in advanced manufacturing sectors in Western and Northern Europe – particularly those focused on machinery, electronics, and automotive – this share exceeds 40%. Manufacturing sectors generally display higher AI uptake than services.

4. Nonlinear Relationship: Threshold Effects Matter

Perhaps most importantly, the researchers found that AI’s inflation-reducing effects are nonlinear. At low rates of AI adoption, there is no significant reduction in inflation. This suggests the existence of a threshold effect—meaningful economic benefits from AI require substantial adoption rather than marginal implementation.

The evidence led the authors to conclude: “The findings suggest that the integration of AI technologies constitutes a structural force dampening inflation.”

Key Investor Takeaways

For investors navigating markets in an era of rapid technological change, this research offers several strategic insights:

Inflation Trajectory Considerations

If AI adoption continues to accelerate across the EU, this could contribute to a more benign inflation environment than many investors currently anticipate. This has implications for fixed income positioning, as lower structural inflation could support bond valuations and allow central banks to maintain more accommodative policy stances.

The Threshold Effect and Market Leaders

The nonlinear relationship between AI adoption and inflation reduction indicates that companies investing heavily in AI—crossing critical implementation thresholds—may see disproportionate benefits compared to firms with only modest AI initiatives. This suggests a “winner-takes-more” dynamic that could favor market leaders in AI adoption.

European Market Positioning

The stronger effects observed in Eurozone countries suggest that European equities, particularly in the services sector, may be underappreciated by investors focused primarily on US technology leadership. European companies successfully leveraging AI could deliver unexpected productivity gains.

Monetary Policy Implications

If AI adoption contributes to lower structural inflation across the Eurozone, this could influence European Central Bank policy decisions. Lower inflation pressure might allow for more accommodative monetary conditions than markets price in, potentially supporting equity valuations and reducing pressure on indebted governments.

Long-Term Structural Shift

This research adds to growing evidence that AI represents not just a cyclical technology trend but a structural force that could reshape inflation dynamics over the coming decade. Investors should consider portfolio positioning that accounts for a potentially lower-inflation environment than historical averages.

Implications for the United States

While this research focuses on the European Union, the findings may have even more significant implications for the United States economy and inflation dynamics. The US services sector represents approximately 80% of GDP, substantially higher than the EU’s 66%. Given that the study found AI’s deflationary effects are most pronounced in services, the potential impact on US inflation could be considerably larger than what the researchers observed in Europe.

This structural difference suggests several important considerations for US investors and policymakers. First, as American companies continue to lead in AI development and adoption rates, the deflationary pressures from AI implementation may materialize more quickly and powerfully in the US than in the EU. Second, the Federal Reserve’s inflation forecasts and policy trajectory may need to account for AI-driven productivity gains that could persistently suppress price pressures in the dominant services sector. Third, the threshold effects identified in the European data imply that as major US service providers---from healthcare to financial services to retail---cross critical AI adoption levels, we could see accelerated disinflationary trends that reshape market expectations for interest rates and monetary policy.

For US-focused investors, this means the inflation-suppressing dynamics observed in Europe may provide a preview of even stronger effects domestically, with profound implications for bond markets, equity valuations in AI-adopting companies, and the sustainability of accommodative monetary policy well into the future.

The Bottom Line