Philip Jefferson said the surge in AI-related investment is boosting demand, driving up prices of certain goods and adding to broader price pressures.

  • Jefferson said expectations of long-term productivity gains from AI are already having a significant impact on economic activity.
  • He pointed to rising equity prices, partly fueled by enthusiasm around the technology, as one factor boosting household wealth and spending.
  • Jefferson highlighted that meanwhile, companies are pouring money into data centers and related infrastructure to support AI model training and inference, driving a sharp increase in business investment.

Federal Reserve Vice Chair Philip Jefferson has warned that the massive artificial intelligence infrastructure buildout is adding to inflationary pressures in the U.S. economy, even as the technology promises to deliver substantial productivity gains over time.

Speaking at the University of California, San Diego, on Friday, Jefferson said the surge in AI-related investment is boosting demand, driving up prices of certain goods and adding to broader price pressures.

However, he expects those inflationary effects to ease as supply catches up and productivity gains begin to materialize.

Jefferson Says AI Boom Is Driving Investment, Household Spending

Jefferson said expectations of long-term productivity gains from AI are already having a significant impact on economic activity.

He pointed to rising equity prices, partly fueled by enthusiasm around the technology, as one factor boosting household wealth and spending.

Jefferson highlighted that meanwhile, companies are pouring money into data centers and related infrastructure to support AI model training and inference, driving a sharp increase in business investment.

“Firms are building and equipping new data centers on a very large scale to support model training and inference, driving rapid growth in aggregate business investment,” Jefferson said.

He added that this spending is already “putting upward pressure on resource utilization and the general price level.”

Memory And Logic Chips Face Supply Constraints

The Fed Vice Chair believes that the inflationary impact is particularly visible in industries struggling to keep pace with surging AI-related demand.

Jefferson pointed to memory and logic chips as examples of sectors where investment demand has outstripped available supply, contributing to steep price increases.

The implications extend beyond the semiconductor industry. Higher costs for components used in technology products and services are feeding into prices across the broader consumer economy.

Jefferson noted that the boom in demand for new technologies has been driving “unusually strong cost increases for consumer goods and services that depend on the same inputs, like memory.”

The pressure comes at a time when inflation remains considerably above the Fed’s 2% target. The personal consumption expenditures (PCE) price index rose 3.6% on an annualized basis in September, while core PCE inflation, which excludes food and energy, stood at 3.1%.

Productivity Gains Could Eventually Ease Inflation, Says Jefferson

Despite the near-term price pressures, Jefferson expects AI adoption to eventually expand the economy's productive capacity and help moderate inflation.

As semiconductor manufacturers and other suppliers increase capacity to meet demand, supply constraints should ease. At the same time, wider AI adoption could help businesses produce more with fewer resources, lowering production costs.

“My baseline view is that adoption of new technology will ultimately lift the economy's productive capacity substantially but gradually,” Jefferson said, while cautioning that the timing and magnitude of those gains remain uncertain.

He also highlighted the potential consequences for monetary policy, arguing that if AI-driven productivity growth encourages businesses to invest more and households to spend more, it could push the economy's neutral interest rate higher.

For now, inflation remains his primary concern. Following the Fed's decision to hold interest rates steady at its October meeting, Jefferson said the latest economic data showed persistent price pressures.

“Accordingly, I see the trajectory of inflation as providing the more important signal for determining the appropriate stance of monetary policy,” he said.

During the after-hours session on Friday, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, declined 0.63%; the Invesco QQQ Trust ETF (QQQ) fell 0.83%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) was down 0.37%. Retail sentiment on Stocktwits toward the S&P 500 ETF was in the ‘extremely bullish’ territory at the time of writing.

The Global X Artificial Intelligence & Technology ETF (AIQ) fell 1.29% on Friday, while the iShares U.S. Technology ETF (IYW) declined 1.32%.

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