AI Boom Fueled Inflation, Delaying Return to 2% Target

Central bank officials are warning that the artificial intelligence (AI) boom is adding to inflationary pressures and delaying the return of the US economy to its 2% target.

Federal Reserve Governor Lisa Cook said at Oakland Tech Week that AI appears to be fueling short-term price increases, particularly in sectors related to technology such as chips, computers, and software. However, she noted that some of these price hikes are due to a shift in spending towards AI, which should moderate once supply catches up.

Cook warned that the more significant risk comes from the AI infrastructure buildout competing for resources used throughout the economy, including construction labor, energy, and water. This competition has driven up costs, with electricity and water prices rising about 5% over the past year.

Cleveland Fed President Beth Hammack has also sounded an alarm on the impact of hyperscalers' aggressive spending on critical data-center equipment, while policymakers' September projections point towards at least one more rate increase this year. Governor Michael Barr emphasized that high energy prices and AI-related investment have knocked the central bank off course on its inflation goal.