Federal Reserve Governor Lisa Cook said on September 28 that artificial intelligence infrastructure construction will continue to put pressure on U.S. inflation in the coming months. Rising oil prices and supply chain disruptions caused by Middle East conflicts may also push prices higher. She expects that the productivity gains from AI may modestly ease inflation in the coming years, but will be hard-pressed to offset the spreading price pressures this year.
Data center demand may transmit price pressures to other industries. In her speech, Cook noted that over the past year AI investment has driven up prices for chips, computers and software. Some of this reflects price changes caused by demand concentrating in specific industries, and as supply chains adjust, the related pressure may ease on its own. But data center construction also requires large numbers of construction workers and energy, resources that are shared with other industries, and this may create broader inflationary pressure. She said companies have announced AI investment plans totaling about $2 trillion, with only a small portion spent so far. Over the past year, U.S. electricity and water costs each rose about 5%, and Cook believes AI demand may be part of the reason. She also noted that core goods prices have risen at an annualized rate of more than 3% so far this year, and it is necessary to watch whether price pressures spread further.
There is a time lag between productivity gains and current investment spending. Cook expects that AI-driven productivity improvements will have some dampening effect on prices in the coming years, but these benefits will not appear in time to offset the inflationary pressure that may widen later this year. The effect also depends on how quickly companies adopt AI, whether production processes can be improved accordingly, and how productivity gains are passed through to wages and goods prices. AI's impact on employment is also still developing. Cook said the unemployment rate and layoff levels remain low, and AI has not yet significantly changed the overall labor market structure; but demand has shown signs of declining in roles such as software programming and simultaneous interpretation, and some recent graduates are finding it harder to get jobs. If a mismatch between skills and job demand leads to a higher unemployment rate, rate cuts could ease employment pressure while rekindling inflation.
Subsequent rate adjustments depend on inflation and employment data. At its September meeting, the Federal Reserve raised the target range for the federal funds rate by 25 basis points to 3.75%–4.00%, and Cook voted in favor of the decision. In this speech, she said that in the 12 months through August, U.S. headline inflation was estimated at 3.8% and core inflation at 3.4%, both above the Fed's 2% target. Cook believes the current labor market can withstand higher interest rates. As for the future policy rate, she said judgments will be made based on the effects of previous rate hikes as well as future inflation and employment data.
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