AI is making inflation harder to tame, CNN warns: staggering spending on data centers

As CNN reports, concerns about the cost of living and turmoil in the bond market do not stem from a weak economy — quite the opposite. Prices and interest rates are rising very fast for three reasons: the global energy shock from the wars in Iran and Ukraine, the escalating trade war, and corporations’ unprecedented spending on artificial intelligence.

According to CNN, the sums Big Tech is pouring into building AI data centers are worrying economists more and more. AI infrastructure alone — data centers, chips and servers — is expected to reach about $1 trillion this year, according to JPMorgan, more than the federal government’s annual military budget. According to Columbia University economist Stijn Van Nieuwerburgh, in a study published by the Brookings Institution, by 2032 this spending will reach $10.3 trillion — the equivalent of a $1.2 trillion infrastructure bill spent every year for a decade. Goldman Sachs estimates that AI infrastructure spending will account for 1.9% of the U.S. economy this year and an average of 3.6% of GDP each year through 2032 — more than any previous investment boom in U.S. history, from canals and railroads to the power grid and highways.

“All of this will bring a structural transformation of the U.S. economy toward a model organized around artificial intelligence,” says Joe Brusuelas, chief economist at RSM US, quoted by CNN. The problem is that this colossal spending is creating what economists call a “demand shock” that produces inflation. Building data centers is pushing prices higher due to staggering demand for memory chips and storage space, construction materials, electricity and labor — builders, plumbers and electricians. Supply constraints, regulations, immigration restrictions and permitting problems have kept supply from catching up with extreme demand, and this pressure is spreading across the economy.

Chicago Federal Reserve President Austan Goolsbee warned on September 21 in a speech in London that he is closely monitoring whether “building AI data centers is going off the rails” and creating more economic activity than the economy can absorb. “And if demand overheats, there is no ambiguity about how the Fed should respond,” he said — the central bank would have to raise interest rates further.

According to CNN, the economy is already running at full capacity: manufacturing activity in August was the highest since July 2021, according to the S&P Global PMI index, unemployment is just 4.1% — the level known as “full employment” — and retail sales rose 1.2% in August. The AI-fueled stock rally has allowed the richest 40% of Americans to keep spending without pause: they account for 70% of total consumption, according to the New York Fed — which gives companies room to raise prices, especially with record oil and shipping costs, as well as revived tariffs.

“Everything AI touches is burning — tech investment, data-center construction, even manufacturing the parts for them,” says Heather Long, chief economist at Navy Federal Credit Union, for CNN. “But the overwhelming majority of citizens are only getting higher costs without much financial benefit.” Meanwhile, the Fed’s higher interest rates are making borrowing more expensive for businesses — but Nationwide economist Oren Klachkin warns that “AI investment is rate-insensitive and unlikely to slow down anytime soon.”