Fed's Goolsbee: AI Is Becoming an Inflation Problem

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2 hours ago

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Chicago Fed President Austan Goolsbee said that inflation fueled by the AI boom is "crossing boundaries" and beginning to push up prices in areas of the economy that were previously unrelated. He stated: "The areas experiencing price increases are no longer limited to data center components and directly related industries. I am increasingly concerned that this is a classic case of aggregate demand overheating."

Prices for land, electricity, water resources, infrastructure construction, and electrical components needed for data centers have risen sharply. Such price increases have not yet transmitted to consumption items that ordinary residents are sensitive to, such as groceries and haircuts. However, economists are closely watching how the wealth effect brought by AI translates into consumer spending — whether it is the new millionaires in Silicon Valley whose paper wealth has surged, or construction workers whose incomes have risen.

Fed Governor Lisa Cook warned last month that "AI-driven demand will bring certain pressures to the overall economy," but she believes that so far this boom is more like a shift of demand toward AI-related industries rather than an expansion of aggregate demand across society. She said that using rate hikes to address this kind of sector-specific inflation "could be a mistake."

Goolsbee currently does not have voting rights on the Fed's rate-setting committee and will join the committee in 2027. He and a group of economists are breaking down the composition of current stubborn inflation: August inflation was 3.4%, and September data will be released this week; part of the inflation comes from Middle East conflicts pushing up oil prices (over which the Fed has limited influence), and another part comes from overheating demand for goods and services across society.

When asked whether the Fed needs to raise rates again at its policy meeting later this month, Goolsbee said: "If inflation remains persistently high, then what action the Fed should take — the answer is self-evident."

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