AI is contributing to inflation, Fed governor says

Along with uncanny valley food photos and slop videos, there’s something else we can blame AI for: inflation.

AI is among the factors contributing to inflation, Fed board member Lisa Cook said during a September 28 speech at Oakland Tech Week.

As the data center buildout intensifies, demand for energy and construction labor affects the economy broadly, Cook noted. “Prices for AI-related goods—such as chips, computers, and software—have surged,” and electricity and water prices have both risen around 5% in the past year, she said.

Outsized spending concentrated in the AI sector has also boosted inflation, Cook said: “Had that demand been spread evenly across the economy, the overall price index would not [have] climb[ed] as much,” she observed.

The personal consumption price index increased 0.31% for the month of August and was up 3.4% YoY—the sixth straight month above 3%.

As AI gets more efficient and costs go down, Cook predicts inflation will moderate. “As supply chains adjust and efficiency gains accrue, this kind of pressure should resolve on its own without policy intervention,” she said.

Cook also foresees AI-enabled productivity growth resulting in “modest disinflation within the next few years.” A scenario in which gains “are spread evenly across the economy” could bring “limited but real” relief, she said.

Alternate timeline. But less rosy scenarios are possible, Cook acknowledged, including ones in which productivity gains are not passed on to workers, or gains are realized mainly by higher-income workers who tend to save rather than spend their new wealth.

The former senior economist on President Obama’s Council of Economic Advisers also raised the possibility that AI could lead to higher unemployment and reduced consumer confidence. AI could bring about “the most significant reorganization of work in generations,” she said. While it hasn’t yet affected the labor market that much, she said, there have been warning signs, such as reduced employment in areas like coding and translation, and the fact that college grads are struggling to find jobs.

Cook is optimistic about AI’s long-term economic benefits, stating that “AI-fueled productivity growth can raise living standards for all Americans.” As evidence, she points to the fact that small businesses as well as large are seeing productivity gains from AI, and that the technology is contributing to a “historic boom…in new business formation.”