FDA Approved AI & Inflation

AI Health Care

In April, we wrote about evidence that AI was having a positive impact on overall productivity. Intuitively, it makes sense that AI would enhance productivity, but in practice, it’s difficult to quantify results. I recently connected with Michael Abramoff of Digital Diagnostics to discuss this topic. His product, LumineticsCore, was the first FDA-approved AI diagnostics tool in 2018, a significant AI achievement predating the ChatGPT craze.

Last year, Michael published, in Nature, a randomized controlled trial that showed evidence of a 40% increase in clinic productivity when using AI models and machinery for diabetic retinopathy eye exams. For context, diabetic retinopathy is the leading cause of blindness in the US. Patients can be put in front of this machine and receive a diagnosis without a specialist ever being involved.

Training more specialists at scale takes significant time and resources. This is true for all fields. Like all supply and demand dynamics, a higher total supply of retinopathy exams can reduce prices. This is another example of innovation-driven deflationary forces.

Let’s fast forward and take this trend to its logical conclusion. Healthcare is costly for people and for governments, and it’s in persistent high demand. Early screening helps with prevention and preventative care is less expensive than treating advanced complications. In theory there’s no limit to the number of tests we can automate. In practice, building those tests requires nuanced oversight from leading experts in each field. While the timeline for more AI automated tests may be incremental, the potential benefits are immense.

Returning to the original productivity concept, GDP growth results from population growth, productivity growth and money supply (debt) growth. US GDP growth generally translates to stock market growth and overall prosperity. While the US population is not growing organically, it is growing thanks to immigration. Productivity is increasing thanks to AI. If productivity can jump 40% on the introduction of a new technology, spread across multiple industries and sectors the impact on GDP growth can be tremendous.

AI skeptics should assess AI progress by examining niche industry wins, such as Digital Diagnostics’ impact on retinopathy exams. It’s the far-reaching impact of AI that ultimately makes this technology so revolutionary.

Surge Pricing – my ramblings on inflation

Almost every week I have something I want to say about inflation. It’s a very big topic and I almost always hold back because it’s difficult to discuss one angle on the inflation story without discussing all of them. I’ll put the various inflation considerations in list format to help with organization:

• Inflation portfolio hedges in the short, medium and long term
• Inflation assumptions and the impact on projected investment returns
• Inflation’s impact on wealth preservation or purchasing power preservation
• Inflation from a personal expense management perspective
• Inflation and the overall impact on the economy and Fed policy
• The accuracy of reported inflation figures vs commodity prices and independent sources
• Technology’s deflationary impact
• Inflation and 1971
• Inflation and how it supports gold or Bitcoin narratives
• Commodity supply constraints that contribute to all goods and services inflation
• Others that I haven’t thought of or didn’t represent correctly in this list

This week Bloomberg’s OddLots podcast covered surge pricing, or personalized algorithmic price gouging, how an increasing number of businesses have figured out how to maximize revenue with minute personalized details. Surge pricing is something I think about both as a consumer and someone watching the CPI trend and the Fed’s rate policy.

Before I ramble about personal expense management and algorithmic price gouging, I’ll state my views on inflation and its impact on investment returns because, realistically, that is the more important investment-related topic. In many cases, the US has underinvested in bringing new commodity supplies online. Environmental concerns primarily drive the lack of investment. The problem is it’s not possible to operate a developed nation without continuous access to cheap commodities, especially cheap energy. We are now positioned to have increased commodity price inflation due to underinvestment. Overall prosperity tends to be linked to access to cheap commodities. Copper price increases are a primary focus for many investors who are knowledgeable in this space.

I wanted to discuss surge pricing this week because thoughtful consumption has an enormous impact on personal expense management and, ultimately, the rate of inflation you feel personally.

It’s shocking but not surprising that companies use personalized data opportunities to maximize revenue. Researchers found that Uber shows higher fares when your phone battery is low, knowing the sense of urgency is higher than normal. McDonald’s will raise prices on your app version if it has data showing that you just received a biweekly paycheck. It seems hyper personalized pricing might just be getting started given how much opportunity there is for companies in alternative data. Unfortunately, opportunistic pricing engines disproportionately hurt lower-income families with less flexibility. There is a big question of fairness here. It’s also somewhat unfair that wealthy people get more discounts from companies hoping to initiate new relationships.

On the other hand, consumers have long been able to set price alerts on Amazon products via CamelCamelCamel. For example, a Breville Espresso Machine frequently jumped between $550 and $750 over the past year. People can use GasBuddy or Google Maps to find the cheapest gas station, which is often dramatically cheaper. I know from experience that gas in Boston is way more expensive than just a mile or two outside the city.

Conscious consumption is necessary for preserving purchasing power regardless of your level of wealth. The less “in a rush” you are, the better pricing opportunities you’re going to have. Much of this goes back to classic supply and demand rules, however this new trend can feel a bit insidious, unfair and dystopian. A general awareness of the subtle ways companies try to take advantage of you should be sufficient to counteract the impact on your personal inflation rate. It’s also unclear how to combine this trend with CPI data which relies on price consistency for all consumers.