According to Torsten Slok, Chief Economist at Apollo Global Management Inc., the initial phase of artificial intelligence infrastructure development is likely to increase inflation. This could prevent new Federal Reserve Chair Kevin Warsh from cutting interest rates as quickly as he has previously suggested might be possible.

Slok stated on Monday that the wait for rate cuts might be extended, as the AI surge is certain to push inflation higher in its early stages. He pointed out that price pressure risks are "very clear" when looking at semiconductor costs, energy prices, and labor expenses.

Slok's analysis touches on a core contradiction within the AI boom: while proponents heavily promote the technology's potential economic benefits, its influence is extremely broad, affecting everything from the labor market to monetary policy. Slok noted that fears about job losses are exaggerated, but the scale of capital being invested to support AI infrastructure is immense. Major U.S. tech companies have indicated they plan capital expenditures of up to $725 billion this year, primarily for AI data center equipment.

Warsh has previously suggested that the expected productivity gains from AI should create room for more accommodative monetary policy. His predecessor, Jerome Powell, faced sharp criticism from former President Donald Trump for not cutting rates as quickly or as deeply as Trump demanded.

However, Slok argues that in the initial phase, we should actually expect AI data center construction to drive inflation up, not hold it down.

The inflation rate remains stubbornly above the Federal Reserve's 2% target. The Personal Consumption Expenditures price index rose to 3.8% in April, its highest level since 2023. Warsh's first Federal Open Market Committee policy meeting as Chair is scheduled for June 16-17.

Traders currently see about an 80% probability of an FOMC rate *hike* this year, as construction supporting AI growth pushes up costs from chips to power. Slok added that the lagged effects of tariffs and higher energy prices are also contributing to these pressures.

Prior to the U.S. and Israeli strikes on Iran on February 28th, markets had been betting on more than two Fed rate cuts by the end of this year.