AI infrastructure contributing to inflation concerns

Chicago Fed president Austan Goolsbee warned that the expansion of AI-related data centers could be driving inflation by increasing overall demand. Speaking in London, Goolsbee highlighted that negative supply shocks have become more frequent and persistent this decade, suggesting the Fed may need to move beyond traditional central banking approaches. He emphasized concerns about elevated inflation in service sectors and the potential for AI data center construction to push aggregate output beyond the economy's capacity. Goolsbee noted that while hyperscalers are investing heavily in AI computing power, slightly higher interest rates may not be sufficient to curb spending. However, even if rate hikes do not slow data center development, they could still reduce other spending and help lower demand and inflation. The Fed's next steps remain uncertain following last week's interest rate hike, with the extent of further rate increases now in question. Goolsbee's remarks underscore the growing concern that AI-driven demand could complicate the central bank's efforts to balance aggregate demand and supply.