Nomura: Higher AI productivity does not guarantee disinflation; policy implications are more dovish

Overview

Nomura's North American economics team discusses whether AI-driven productivity gains will lead to lower US inflation. The report's core conclusion is that productivity is not inherently deflationary; while technological progress can lower costs in some industries, it can also raise incomes, investment appetite, and aggregate demand at the macro level. The current AI capital expenditure boom is already showing some inflationary pressure, so clear inflation relief cannot be forecast solely on the basis of future productivity improvements.

Core views

The report argues that Warsh's view that AI will become a significant deflationary force lacks sufficient evidence. The relationships among productivity, wages, unit labor costs, the output gap, and inflation do not transmit mechanically, and empirical relationships have been unstable in recent decades. Strong productivity growth may make policymakers more willing to tolerate robust growth or rising wages, but this differs from assuming that future productivity gains will additionally suppress inflation.

Analysis framework

The report evaluates the relationship between productivity and inflation from the perspectives of theoretical transmission, historical correlations, AI capital expenditure and price pressures, the output gap, unit labor costs, inflation models, and policy misjudgments, mapping this evidence to the implications for Federal Reserve policy.

Methodology notes

• Macroeconomic inflation frameworkProductivity-inflation transmission analysis

  Higher productivity may affect both supply and demand

  Technological progress can lower unit costs, but it can also raise real incomes and stimulate corporate investment. Therefore, the overall direction of inflation depends on supply and demand, policy institutions, and the distribution of wages and profits.

• Cost-push inflation frameworkUnit labor costs

  Unit labor costs equal the ratio of wages to labor productivity

  The report points out that productivity is the denominator, but wages also change as productivity rises. Therefore, accelerating productivity does not necessarily lead to lower unit labor costs.

• Policy reaction functionProductivity shocks and Federal Reserve policy misjudgment

  Misjudging productivity trends may lead to monetary policy deviations

  The report compares the historical experience of underestimating the productivity slowdown in the 1970s and argues that the current AI productivity narrative has already received substantial attention, making a persistent hawkish misjudgment less likely.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US policy rate path

  The AI productivity narrative affects the Federal Reserve's tolerance for growth and wage signals

  Strengths

  If inflation momentum slows and policymakers believe supply is expanding, there is a stronger case for keeping interest rates unchanged.

  Weaknesses

  There is limited stable evidence that productivity directly reduces inflation.

  Comparison

  Rather than viewing productivity as a certain deflationary force, the report emphasizes its two-way effects on demand and investment.

  Risks

  The AI investment boom may sustain inflationary pressure, causing markets to underestimate how long rates will remain elevated.

• US inflation expectations

  AI capital expenditure and productivity expectations jointly influence the inflation narrative

  Strengths

  Improved productivity can raise potential output, meaning strong growth does not necessarily imply overheating.

  Weaknesses

  Historical correlations are weak, and the predictive value of unit labor costs for inflation is limited.

  Comparison

  The report rejects simply applying 19th-century deflationary experience or a single cost-reduction logic.

  Risks

  Technology equipment prices, consumer electronics prices, and wage adjustments may offset the cost relief generated by productivity.

• Assets related to AI capital expenditure

  The AI investment boom is one of the current sources of inflationary pressure identified by the report

  Strengths

  Strong demand and increased corporate capital expenditure appetite indicate that the AI investment cycle remains resilient.

  Weaknesses

  Rising equipment prices and supply constraints may reduce investment efficiency or increase macroeconomic inflationary pressure.

  Comparison

  Compared with long-term productivity returns, more direct short-term evidence comes from rising capital expenditure and component prices.

  Risks

  If financing conditions remain accommodative, advance orders and cross-industry spillovers may reinforce procyclical demand.

Key data

• Report date2026-07-28The document shows Production Complete at 2026-07-28 18:55 UTC.
• Research institutionNomuraThe report was prepared by a team associated with Nomura Securities International, Inc.
• Lead analystsJeremy Schwartz-NSI; Ruchir Sharma-NSI; Aichi Amemiya-NSIThe cover lists the North American economics research analysts.
• Historical relationshipThe negative relationship between productivity and inflation is unstableThe report states that some negative correlation existed from the mid-1960s to the early 1990s, but weakened notably in recent decades, especially after the global financial crisis.
• Short-term AI impactAI capital expenditure may create inflationary pressureThe report states that AI capital expenditure is pushing up technology component prices and creating price pressure in consumer electronics.

Impact & implications

For asset pricing, the report weakens the linear narrative that higher AI productivity will inevitably lower inflation and interest rates. If Federal Reserve officials believe productivity is improving, they may tolerate stronger growth and wage signals, making the rate path more inclined toward holding steady or turning dovish. However, if AI investment continues to boost demand and equipment prices, inflation risks still require monitoring.

Risks

• Demand for AI investment continues to push up technology equipment and component prices, causing short-term inflationary pressure to exceed expectations.
• Policymakers place excessive faith in future productivity gains and underestimate current demand-driven inflation.
• Unstable transmission among productivity, wages, and profit margins increases forecast errors in inflation models.
• If inflation reaccelerates, the dovish policy interpretation may be forced to reverse.

What to watch

• Whether AI-related capital expenditure continues to spread to non-technology industries.
• Subsequent changes in technology component and consumer electronics prices.
• Monthly momentum in US core inflation, the fading pass-through from tariffs, and seasonal factors.
• Changes in Federal Reserve meeting minutes regarding the inflationary impact of AI investment and the deflationary impact of productivity.
• Whether a sustained divergence emerges among wage growth, labor productivity, and unit labor costs.