AI boom to fuel Australia inflation despite higher rates, ex-RBA official says

Australia's burgeoning investment in artificial intelligence (AI) is expected to contribute to inflationary pressures in the near term, according to Jonathan Kearns, a former Reserve Bank of Australia (RBA) official. The central bank, however, may struggle to remain oblivious to these price pressures due to the relatively new nature of the technology and the uncertainty surrounding the timeline and extent of AI investment implementation.

Kearns highlighted that imported equipment, which accounts for approximately three-quarters of data center spending in Australia, may help mitigate some of the inflationary impact. Nonetheless, domestic spending is also projected to drive aggregate demand.

Inflation in Australia has been on the rise, with August seeing a further surge fueled by escalating fuel costs, and price pressures remained widespread. In September, the RBA increased its cash rate for the fourth time in 2026 to a 15-year peak of 4.6%, attributing the inflationary impact to the AI boom. Kearns, now chief economist at Challenger, predicts another rate hike from the RBA this year.

He emphasizes that AI investment is likely to remain resilient against higher interest rates as businesses strive to seize lucrative opportunities. Consequently, the impact of tighter monetary policy is anticipated to predominantly burden households, the exchange rate, and to some extent, non-AI business investment.

Kearns suggests that the full benefits of AI adoption will become apparent in the labor market once businesses transition from employing AI for routine tasks to fundamentally reengineering workflows.