The artificial intelligence build-out is generating real inflationary pressure across the U.S. economy, creating a serious headache for Federal Reserve Chair Kevin Warsh.
Silicon Valley executives including Tesla and SpaceX CEO Elon Musk and OpenAI CEO Sam Altman have loudly promoted AI’s potential to dramatically reduce costs throughout the economy.
Altman recently wrote that “intelligence too cheap to meter is well within grasp,” capturing the optimism that has driven trillions of dollars in investment across the sector.
SoftBank’s Masayoshi Son predicted a 40% drop in prices and said “unnecessarily hard work, sweating work, would no longer be needed” once AI reached its full potential.
Those promises remain far from reality, as corporate adoption has proved slower and more complicated than boosters projected, delaying any meaningful productivity payoff.
Capital expenditure on the AI build-out is expected to reach $581 billion this year in the U.S. and as much as $1 trillion globally, according to Goldman Sachs Research estimates.
That U.S. spending alone amounts to 1.8% of gross domestic product, a share Goldman Sachs estimates will climb to 2.8% by 2028 as infrastructure investment accelerates.
A Census Bureau survey published in May found that only between 17% and 20% of U.S. businesses reported using AI, with adoption far more common at large firms than small ones.
The rush to build power-hungry data centers is pushing household electricity prices higher, with utility costs rising 10% in the two years leading up to July, outpacing the broader 6.2% increase in consumer prices over that same period.
Computer software and accessories costs have surged 22.4% since July 2024, according to consumer price index data released by the Bureau of Labor Statistics, reflecting the strain AI demand is placing on supply chains.
JPMorgan Chase estimates the cost of dynamic random access memory, or DRAM, will have risen by 400% by the end of the year compared with 2024, as AI companies race to secure chips from manufacturers including Nvidia (NVDA).
Minneapolis Fed President Neel Kashkari dissented in favor of a higher interest rate at the Fed’s July meeting, stating that “the massive investment in data centers has also added a new demand element to the high inflation Americans are experiencing.”
Fed officials voted in July to leave the benchmark interest rate unchanged in a range of between 3.5% and 3.75%, though the decision was not unanimous as policymakers debated AI-driven price pressures.
Ronnie Chatterji, chief economist at OpenAI, acknowledged the lag between investment and impact, saying “it’ll still be a little while before we see it sort of clearly for productivity statistics.”
Chatterji noted that AI power users deploy the technology at eight times the rate of average companies, a gap that has grown from two times since OpenAI published a report on the subject three months ago.
Peter Boockvar, chief investment officer of OnePoint BFG Wealth Partners, cautioned that even the internet boom produced only a 1.5% productivity gain over 30 years, questioning whether generative AI will outperform that benchmark.
“To think that generative AI is going to bring that level of enhancement to the economy, relative to the internet, is tough,” Boockvar said. “Technology has always made people more productive. But is generative AI multiple step functions higher? We just don’t know.”
Julie Averill, Lululemon’s former chief information officer, warned that corporate implementation remains far harder than the industry suggests, saying “the hype is around the ease of the technology in a large organization.”
Warsh, who wrote before his confirmation that “AI will be a significant disinflationary force,” has since adopted a more cautious tone, acknowledging that “the precise timing and magnitude of effects on the supply side remain hard to predict.”
“The cost and inflationary aspect is really complicating Kevin Warsh’s job,” Boockvar said. “He wants to believe in the productivity enhancements down the road — but it’s not something he can react to.”
