AI is an inflation problem, Fed’s Goolsbee says

Chicago Fed President Austan Goolsbee warns that the AI boom is causing prices to rise in sectors beyond just data centers, potentially leading to broader inflation. Inflation in areas like land, electricity, and construction has surged, but not yet affecting consumer staples. Fed Governor Lisa Cook notes some economy-wide pressure from AI demand, but it appears as a shift in demand toward AI-related sectors rather than increased overall demand.

Goolsbee, set to join the Fed in 2027, believes that if inflation persists, the central bank may need to raise interest rates. However, he acknowledges that the Fed's tools may not be effective in curbing demand for AI inputs, as companies like Alphabet and Meta have strong cash flows that can absorb higher interest rates. The issuance of new AI-linked debt fell in August, suggesting investors may be cautious, but this could be offset by corporate executives' willingness to take on more debt.

Goolsbee cautions that while the job market remains stable, growth and consumer spending are also robust, but inflation remains a concern.