AI spending adds to US growth and complicates the Fed’s inflation fight

In short: Heavy investment in AI is helping keep the US economy strong, but it is also adding cost pressures that make the Federal Reserve’s job harder.

What's going on

Companies are spending heavily on AI, and that spending is feeding economic growth. It also raises demand for the building blocks behind AI, like computer chips, data centers (large buildings full of computers), electricity, and skilled workers. When many buyers chase the same limited supplies, prices can rise, like a rush on concert tickets.

Inflation is still above the Fed’s goal. The San Francisco Federal Reserve said PCE inflation, one of the Fed’s main inflation measures, was 3.4% in August compared with the Fed’s 2% target. It said most of the extra inflation came from energy, tariffs, and services, not AI alone.

Still, AI is showing up in some price data. The San Francisco Fed said inflation for information-processing equipment, which includes some computing gear, reached 13% in August. It estimated AI added about 0.2 percentage points to overall PCE inflation, while Goldman Sachs estimated about 0.45 percentage points for core PCE inflation, and expects that pressure to ease in 2027.

Consumer spending has also stayed stronger than many expected. One reason is that AI-linked stock market gains have boosted the wealth of higher-income households, and they make up a large share of total spending.

What to watch

The Fed faces a two-sided story. The AI buildout can push prices up now by competing for power, equipment, and workers. Over time, broader AI use could raise productivity (getting more done per hour) and lower costs, but when and how much that happens is still uncertain.

Source: NYTimes