AI Build-Out Complicates Fed's Inflation Fight
The build-out of artificial intelligence is causing near-term inflation and posing a dilemma for the Federal Reserve, as the costs of implementing AI are piling up before its full-scale payoff arrives.
The artificial intelligence boom, hyped by Silicon Valley leaders such as Elon Musk and OpenAI CEO Sam Altman, is not yet delivering on its promise of deflationary effects. Instead, the spread of AI into the economy is hitting a wall of corporate inertia, causing some near-term inflation and producing little evidence of a sustained productivity boom.
The Cost of AI Build-Out
Company adoption of AI has proved slower than promised, and the tech industry's multitrillion-dollar spending spree on data centers and AI infrastructure has snarled supply chains. The cost of building out AI is raising prices in sectors like electricity, with household electricity prices rising 10% in the two years leading up to July. This poses a dilemma for the Federal Reserve, which needs to make decisions about how to manage inflation.
The immediate costs of AI are easier to spot than its potential benefits, according to Ronnie Chatterji, chief economist at OpenAI. While some companies are seeing success with AI, others are struggling to adopt it, and the full-scale payoff has yet to arrive. Capital expenditure on the AI build-out is expected to reach $581 billion this year in the U.S., and as much as $1 trillion globally, according to Goldman Sachs Research.
AI Adoption and Productivity
A survey by the Census Bureau found that between 17% and 20% of U.S. businesses reported using AI, which is far more prevalent at large firms than small ones. However, the productivity gains from AI are not yet clear, and some economists are cautioning that the industry's promises need to be taken with a grain of salt. Peter Boockvar, chief investment officer of OnePoint BFG Wealth Partners, compared AI to the last major tech-driven productivity boom, the internet, and noted that even during that period, the U.S. saw only a 1.5% gain in productivity over a 30-year period.
| Category | 2024 | 2028 |
|---|---|---|
| U.S. Capital Expenditure on AI | $581 billion | $1 trillion |
| Global Capital Expenditure on AI | $1 trillion | |
| U.S. AI Adoption Rate | 17-20% | |
| U.S. GDP Share of AI Spending | 1.8% | 2.8% |
The Fed's Dilemma
The Federal Reserve is facing a dilemma in managing inflation, as the costs of AI build-out are complicating its decisions. Fed Chairman Kevin Warsh has appointed a task force to inform how the central bank thinks about AI and its effect on the economy, and the team will report back in a few months. However, some Fed officials are not convinced that AI will be a significant disinflationary force, and are worried about the potential for AI-driven price increases. The rush to build power-hungry data centers is contributing to rising utility bills for many Americans, and prices on certain products have shot up, with the cost of dynamic random access memory rising by 400% by the end of the year compared to 2024.
