Chicago Fed President Austan Goolsbee tells Semafor that AI driven inflation is jumping out of its lane and starting to look like overheating demand
AI IS AN INFLATION PROBLEM, FED’S GOOLSBEE SAYS - SEMAFOR
Context
If Fed officials see the AI buildout as a source of broad inflation, it raises the odds of higher interest rates, which would hit both AI financing and the wider economy.
DeItaone is relaying an interview Goolsbee gave to Semafor's Compound Interest, published October 12, and Reuters also reported it. Goolsbee does not have a vote on rate policy this year. The remarks came the same day Fed Governor Christopher Waller tied rising yields to AI investment and growth.
Deep dive
On October 13, DeItaone posted: AI IS AN INFLATION PROBLEM, FED'S GOOLSBEE SAYS, citing Semafor.
Reuters quoted Goolsbee telling Semafor: This is starting to feel like aggregate overheating, that the AI data center cost increases are jumping out of its lane, that prices are going up in spaces that are not just components in data centers and the directly adjacent industries to data centers. According to Semafor, as summarized by Forex Factory, prices for land, electricity, water, construction and electrical components used in data centers have surged.
Goolsbee said that unlike supply shocks, which tend to fade on their own, overheating demand takes a long time to build and is hard to get rid of once it starts. He said the conventional wisdom is to act decisively and quickly to keep it from rolling into inflation expectations. If inflation remains persistent, he said, it is clear what the Fed has to do, while some progress on tariff and oil driven inflation would be needed to return to rate cuts.
TipRanks reported that Goolsbee also described a scenario where AI investments do not pay off and lead to an ugly unwind similar to the dot com crash, with the damage depending on how much leverage is involved.
What to expect next
Watch whether other Fed officials join Goolsbee and Waller in tying AI investment to inflation and higher rates ahead of the October 28 decision.
Also watch upcoming inflation data for signs that price increases are spreading from data center inputs like electricity, land and construction into general services, which Goolsbee said would be the key warning sign. Markets will also react to any shift in rate expectations.