The direct inflationary impact of AI components like software is minimal, as they are less than 1% of the consumer basket. The more significant, yet harder to predict, risk is that AI-driven optimism boosts overall economic demand and 'animal spirits,' creating broad-based price pressures.
The European Central Bank has more room to raise interest rates because its policy is still considered within the 'neutral' range, not yet restrictive. Even another hike to 2.5% would likely be viewed by many governing council members as non-restrictive, a stark contrast to the U.S. Fed's stance.
The Bank of Japan can afford a slow normalization path because Japan's inflation is not demand-driven. The primary causes are a weak yen and supply-side shocks. Tepid consumer demand, just 1% above pre-COVID levels over seven years, indicates there is no domestic pressure for aggressive rate hikes.
In response to weak domestic demand, China's government is expected to deploy a 2 trillion RMB fund already available in its budget. The focus is on executing planned infrastructure spending in the second half of the year, rather than introducing a new, large-scale stimulus package.
