Fed Sees AI Inflation Risk Before Any Possible Productivity Payoff

Policymakers warned that strong demand for AI infrastructure is likely to sustain upward pressure on prices for technology products and electricity, according to minutes of the Fed's 16-17 Jun meeting. Most participants also considered scenarios in which persistent inflation driven partly by AI-related demand could warrant further policy tightening.

"Many participants noted that ongoing strong demand for AI infrastructure would likely sustain upward pressure on prices for technology products and electricity," the minutes said.

The concern exposes a timing problem for the Fed. AI systems rely on large data centres packed with power-intensive computing equipment, increasing electricity demand as technology companies accelerate spending on new infrastructure. However, power generation and grid capacity can take longer to expand, creating the potential for demand to outpace supply and put upward pressure on electricity prices.

The scale of the shift is already visible across crypto mining. Bitcoin miners have announced more than $100bn of long-term AI computing contracts over the past two years, according to a Sandmark analysis, as operators redeploy power access towards AI workloads. 

The Fed staff said the AI buildout was already contributing to higher consumer prices and attributed part of the rise in core goods inflation to "AI-related price pressures." Nonetheless, investment in data centres, high-tech equipment and software was also continuing to support economic growth, the minutes showed.

The central bank acknowledged that AI could eventually work in the opposite direction. Some participants said productivity gains from adoption could reduce production costs and increase aggregate supply, putting downward pressure on inflation, although they cautioned that "this effect would likely take time to materialize."

Other pressures persist

AI was only one of several forces complicating the Fed's inflation outlook.

Officials also pointed to the lingering effects of tariffs, supply-chain disruptions linked to the US-Iran conflict and higher energy and other input costs. Several participants said price pressures had become more broad based, affecting areas including transportation and agricultural inputs.

Inflation is already running well above the Fed's 2% goal, with its preferred headline measure at 3.8% in April. Fed staff estimated it rose further to 4.1% in May.

Officials also became more pessimistic about the rest of the year. Their median forecast for headline inflation at the end of 2026 rose to 3.6% from the 2.7% seen in March, while the underlying core measure was projected at 3.3%.

Rate path divides Fed

The inflation concerns exposed a broader divide inside the Fed over where interest rates should go next.

Policymakers unanimously held the federal funds rate at 3.5%-3.75% in June, though a few participants said there was already a case for raising rates at the meeting. The wider split centred on the rest of the year. Many participants judged that rates should end 2026 within or slightly below their current range, while many others thought they should be higher, the minutes showed.