Federal Reserve officials are increasingly treating the artificial intelligence investment boom as a lasting source of inflation, leaving financial advisors to consider how much higher rates may go, and which parts of client portfolios will pay for it.
In an interview with Semafor last week, Chicago Fed President Austan Goolsbee said price pressures tied to data-center construction are spreading into the broader economy.
“This is starting to feel like aggregate overheating, that the AI data center cost increases are jumping out of its lane, that prices are going up in spaces that are not just components in data centers and the directly adjacent industries to data centers,” he said.
In a separate conversation with Yahoo! Finance, Goolsbee described the dynamic on the ground in his own district as business owners' grow increasingly frustrated at skyrocketing costs fueled by tech giants eating into the same resources.
"A lot of it is we're in competition for the same resources, the same electricians, the same components, the same land, the same construction," Goolsbee said.
In September, the Fed raised its benchmark rate by a quarter point to a range of 3.75% to 4%, marking the central bank's first hawkish move in three years driven by a unanimous vote. The next decision is due this month, and rate futures are pointing to a pause before a projected quarter-point increase to close out the year in December, according to Reuters.
Goolsbee does not vote on policy this year. He separated two kinds of inflation that bond investors should keep apart: supply shocks usually fade on their own, while demand-driven overheating does not.
“It takes a long time for overheated demand to get going, and once it’s going, it’s hard to get rid of that,” he said.
Fed Chair Kevin Warsh has moved toward the same view. At International Monetary Fund meetings in Thailand last week, he called AI investment a shock to both prices and demand. He also said he expects wealth and productivity gains from the technology over time.
“If you’re a central banker and you’re in the business of trying to ensure stable prices and full employment, you’ve got to recognize this as a shock,” Warsh said, according to Reuters.
The AI industry is expected to invest about $1 trillion next year, roughly 3% of gross domestic product, as per Reuters reporting. Separately, research firm Gartner has estimated that AI providers will spend close to $1 trillion on infrastructure in 2026 alone.
September consumer prices rose 3.7% from a year earlier, and core CPI rose 2.6%, slightly above economists’ 2.5% forecast, which raised the odds of an October Fed rate hike.
AI firms, particularly the largest hyperscalers, have been aggressively spending with little regard to borrowing costs. As a result, economists expect the strain to fall on small businesses, credit-dependent households and companies outside the AI supply chain.
Cleveland Fed President Beth Hammack has acknowledged the need to rein in inflation, but also recognized the chilling effect higher rates would have in terms of smaller stock-market gains and slower activity outside AI.
“I like growth...I’m not trying to stop growth. I’m just trying to pull it back a little bit so that it’s moving at a pace that doesn’t put too much pricing pressure out there,” she told Reuters.
Warsh has said he does not expect the Fed to “need to do harm to the labor markets” to bring inflation back to 2%, though some former officials want more detail on that.
“Warsh has said he does not see a conflict between inflation and unemployment. This is worthy of more explanation. Full stop,” former Chicago Fed President Charles Evans said at a National Association for Business Economics panel.
Not everyone expects the pressure to last. In a recent note, Goldman Sachs economists Rindels and David Mericle estimate that AI is adding about 45 basis points to core personal consumption expenditures inflation, attributing roughly half of that to a genuine price effect and the rest to measurement issues.
They expect the effect to peak at 50 basis points by year-end and fall to 10 basis points by the end of 2027, as memory and computer prices rise more slowly.
“In short, the impact of AI demand on inflation is meaningful but moderate, still comes in large part from mismeasurement, and is likely near its peak,” they wrote.
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