Federal Reserve officials are now acknowledging that investment in AI data centers is adding to inflationary pressure, after previously blaming President Donald Trump’s tariff war for rising prices, The Washington Post reports. That pressure comes on top of Trump’s Iran war, which has sent oil prices soaring.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, told Semafor that AI-related inflation is “jumping out of its lane.” Prices, he said, are rising beyond data-center components and directly connected industries. He is “increasingly nervous” that the broader increases reflect “straight, old-fashioned overheating demand.”
Economic overheating occurs when aggregate demand grows faster than the economy’s productive capacity. That gap can drive demand-side inflation and higher prices, eventually reducing demand and consumption. Goolsbee warned that overheated demand takes a long time to build and “once it’s going, it’s hard to get rid of that.”
Grocery prices have not yet been directly affected, but economists are asking whether that could change. It’s also becoming less certain that higher interest rates can meaningfully curb inflation. Rate increases make borrowing more expensive and reduce consumer spending, but their effectiveness against current price pressures is no sure thing.
The Fed raised rates in September for the first time in three years, as inflation remained tough to beat. Futures markets expect another increase later this month, Reuters reports.
That leaves policymakers facing a difficult choice. Goolsbee said that if inflation “remains persistent,” “it’s clear what the Fed has to do”: keep raising rates. Yet tech companies show no signs of slowing their extreme spending on AI data centers. Further rate increases could raise investment costs, making the buildout harder for AI companies to finance.
Tens of billions of dollars are flowing into data centers, and that spending is beginning to mask fundamental problems in the US economy. It is also fueling fears about what the economy might look like if the AI bubble bursts. The construction boom has already affected consumer electronics, where prices have spiked, and housing projects, which face a major shortage of skilled labor.
