Economist: AI Infrastructure Boom Could Boost Inflation in the Short Term, Limiting Fed's Room for Interest Rate Cuts

BlockBeats News, June 1st, Apollo Global Management's Chief Economist, Torsten Slok, stated that the artificial intelligence infrastructure investment frenzy in its early stages may exacerbate inflationary pressure, thereby limiting Federal Reserve Chairman Kevin Warsh's room for interest rate cuts.

Slok pointed out that AI data center construction is driving rapid growth in demand for semiconductors, electricity, and labor. Major US tech companies plan to invest around $725 billion in capital expenditures this year for AI-related infrastructure construction. Although AI is expected to improve productivity in the long term, the massive short-term investment will increase costs and price levels, "not suppress inflation, but rather intensify it."

Meanwhile, US inflation remains significantly above the Federal Reserve's 2% target level. Data shows that the US April PCE price index rose by 3.8% year-on-year, reaching a new high since 2023.

Due to the AI investment frenzy, rising energy prices, and the impact of tariff pass-through effects, market expectations for the Federal Reserve's policy path are changing. Especially after Iran announced a suspension of indirect talks with the US, the market is concerned that an escalation of the Middle East situation will further drive up oil prices and inflation.

On Monday, WTI and Brent crude oil prices rose by more than 6% intraday, the yield on the US 10-year Treasury bond rose to 4.51%, and the 2-year Treasury yield rose to 4.09%. The interest rate swap market indicates that traders have fully priced in expectations of at least one rate hike by the Federal Reserve before March 2027, while the probability of a rate hike this year is around 50% in October.

Analysts believe that if energy prices continue to run at high levels and AI capital spending continues to expand, the Federal Reserve's future monetary policy may face a greater challenge of inflationary pressure.