Fed's Cook warns AI's inflationary pressure to continue in the near-term

One of the great hopes of the AI boom is that it will create a productivity surge that brings down inflation. Don't count on that happening anytime soon.

The big picture: In the near term, the data center buildout is fueling inflationary pressure. And the potential for AI to unleash an era of superabundance carries highly uncertain timing, magnitude and disinflationary effects.

• That is a new warning from Fed governor Lisa Cook, the latest leader at the central bank to offer a nuanced account of how AI is likely to affect the economy and monetary policy.

What they're saying: "I anticipate that productivity gains will provide modest disinflation within the next few years," Cook said in a speech Monday.

• Crucially, she added: "I do not expect those effects to arrive in time to offset the broadening inflationary pressure later this year."

• "In the short term, AI appears to be adding inflationary pressures to the economy, postponing inflation's return to our 2% target."

Yes, but: Cook drew an important distinction between price pressures concentrated in AI-related sectors and those spilling over into the broader economy.

• She argued that some of the surge in prices for chips, computers and software reflects a shift in spending toward AI that should ease as supply catches up.
• "Attempting to fight sector-specific inflation with monetary policy could be a mistake," Cook said. "Our tools are too blunt to target narrow sectors, and addressing relative price shifts is not our role."
• More concerning for the Fed are signs that the AI boom is pushing up costs elsewhere, as data center investment draws on construction, labor and energy used throughout the economy.

Between the lines: Fed chairman Kevin Warsh has pointed to AI-fueled productivity gains as a positive supply shock, which in turn would allow the economy to grow faster without inflation. But in a speech last month, he presented a set of questions rather than definitive answers.

• "We recognize that AI is a new variable — potentially a new factor of production — that will have consequences for both the economy and the conduct of monetary policy," Warsh said in Jackson Hole, Wyoming.
• "It opens some major lines of inquiry: Will the application of AI cause a significant, sustained rise in productivity across the economy? And if so, when?"

Of note: One of the task forces that Warsh has commissioned to re-evaluate deep questions about how the Fed operates is charged with examining the implications of AI for policy and delivering recommendations by year-end.

• Its members are venture capitalist Marc Andreessen, Microsoft executive Asha Sharma and Charles Jones, a Stanford economist on leave working with Anthropic.

The intrigue: Much of the anxiety around AI's economic impact has centered on the threat to jobs. But top policymakers are focused on the more immediate problem from the technology: its potential to add to an already challenging inflation backdrop.

• Cook said there is limited evidence that AI is causing widespread disruption in the labor market, even as its inflationary effects are becoming more apparent.