Possible Deflationary Shock: AI, Demographics, and Policy Force the Fed to Act

Author: Anthony Pompliano, Founder and CEO of Professional Capital Management; Translation: Shaw, Jinse Finance

The US economy is currently being hit by multiple deflationary forces simultaneously. These interwoven trends are forcing the Federal Reserve to lower interest rates and increase the money supply.

First, we know that artificial intelligence and robotics are dramatically increasing efficiency across all areas of the system. Today, companies can generate more profit with fewer employees, a phenomenon often referred to as “benign deflation.” Benign deflation means the rate of supply growth exceeds the rate of demand growth.

So, where can we see this happening in today’s economy? There are countless examples of surging productivity, compressed costs, and improved quality. This has given rise to a “deflationary boom,” where the prices of goods and services decline, enhancing consumers’ purchasing power and supporting GDP growth without causing the economy to overheat.

AI is not only boosting corporate productivity, but we are also gradually approaching the point where AI can write its own software. Tech experts promise that eventually humanoid robots will take on many roles in society, including manufacturing and assembling more humanoid robots. This exponential growth in productivity is hard to comprehend today. But it may be the single most important trend affecting deflation.

Elon Musk, who has founded multiple multi-billion-dollar companies at the intersection of AI and robotics, recently discussed how these technologies should drive deflation and help solve the national debt crisis.

When Elon shares his views on these technologies, combined with the growth in the US money supply, it seems that deflation is the obvious end result.

But Elon understands that AI and robotics are not yet influencing the economy enough to cause deflation. Part of this gap is due to the US government’s massive money printing, and on the other hand, AI and robotics are still at a relatively early stage.

Elon estimates that the US economy will enter a deflationary period within three years.

As everyone knows, Elon Musk is famous for his aggressive timelines, and many critics believe his estimates are off by at least a decade or more. However, I disagree. The pace of innovation and the accelerating adoption of AI and robotics make me think this deflationary effect is much closer than most people realize.

These technological trends are not happening in isolation.

The second major trend we need to pay attention to is demographic shifts and proposed policy adjustments. Both are suppressing consumer demand and shrinking the labor supply, which could result in a “deflationary shock.” Economist David Rosenberg highlights three interrelated forces:

• Aging Workforce: The median age in the US is 42.3 (up from 36 in 2000), and by 2035, the dependency ratio (the ratio of non-working-age to working-age population) will rise to 37%, reducing spending on non-essentials.
• Immigration Restrictions: Stricter policies are limiting population growth and the influx of low-wage labor, curbing household formation and service sector demand.
• Tariffs: Broad tariffs (such as those imposed on imported goods) may significantly cut consumer spending by raising costs, leading to a steep drop in demand.

These three factors could weaken overall demand, causing companies to face oversupply and slash prices to clear inventory, which in turn drives prices down. On the positive side, declining demand may help stabilize inflation in housing and services, but it could also trigger a vicious cycle of delayed consumption and rising unemployment, especially in retail and construction.

Striking the right balance is crucial. What we want is deflation, not recession. This can only be achieved by creating positive supply-side factors, rather than a collapse in demand. This is often called “benign deflation” or “growth deflation,” where falling prices result from higher productivity, technological advances, or improved efficiency, thereby increasing output and real incomes.

For example, over the past year, lower energy costs have demonstrated this “benign deflation.” The decline in energy costs is due to increased domestic production, weak global demand, and improved efficiency from renewables and AI-optimized grids. It’s expected that US gasoline prices will drop by 3% (11 cents per gallon) from 2024 to 2025, and as of July 2025, the year-on-year energy inflation rate will fall by 1.6%.

Falling energy prices have had a broad disinflationary effect, lowering input costs for manufacturing and transportation. This has increased disposable household income (for example, the average driver saves about $150 a year on fuel) and supported profit margins in energy-intensive industries. However, persistently falling energy prices could hurt oil and gas producers (such as layoffs in Texas), leading to regional economic slowdowns. Nationwide, this strengthens the Fed’s path toward its 2% inflation target, but if demand weakens elsewhere, it could heighten deflation risks.

In terms of energy costs, these drivers are mainly supply-side (AI and increased energy production) or from demand restrictions (demographics/policy). This combination promotes sustainable growth, but if intensified, it can also increase the risk of a sharp economic downturn. Once again, striking the balance between deflation and recession is essential.

The US has successfully achieved this balance multiple times in history. Here are a few periods:

We’ve done it before, which means we can do it again. Technology, demographics, and policy can lower prices and create economic prosperity.

Elon Musk knows it’s possible. He is actively working to create such a future. But everyone is talking about inflation, and many investors still seem unprepared for a world where deflation dominates the economy.

As Stanley Druckenmiller once said, “Every serious deflation I’ve observed has been accompanied by an asset bubble, then the bubble bursts.” Given current price levels, many are loudly warning of the existence of asset bubbles. So now the question is: “Will the asset bubble burst and trigger deflation?”

I’ll leave that question for each of you to answer.