AI Interest Rate Uptick Masks Inflation Reality
The impact of AI on inflation is more complex than it seems, according to Morningstar. While it's tempting to assume that the vast sums being spent on artificial intelligence are fueling faster economic growth and pushing up inflation, this thinking is flawed.
Morningstar argues that the main effect of AI today is actually lifting interest rates, not driving inflation. The Federal Reserve is offsetting the demand shock from AI by keeping gross domestic product (GDP) in line with potential, which means higher interest rates but no significant increase in inflation.
The key argument is that the Fed generally offsets demand shocks, such as the one caused by AI. This means that even though AI is providing a large demand shock, the Fed's actions are keeping GDP from rising above its potential, thereby preventing inflation.