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If war and tariffs are not the main market worries, what is?
These days, it seems to be concern that AI investment is adding to inflation pressure, a sentiment echoed by Fed officials in the latest FOMC meeting minutes. Indeed, the rapid build out of AI infrastructure is driving a lot of investment in data centres, semiconductors, and electricity networks, which could create some short-term supply bottlenecks and push up prices of materials and labour. There have already been reports of multiple companies raising chip prices, evident in Chinese inflation data this week. At the same time, strong aggregate demand in the economy coming from private business investments means that there is no hurry to cut rates next year (even if there are other sectors in the economy that don’t do as well), so markets are right to be worried. However, this demand only becomes a lasting inflation problem if productivity fails to keep pace.
Over time, productivity gains should help absorb higher costs; without them, consumers and businesses will have little reason to keep paying more for AI tokens, and prices are likely to adjust back down. In addition, IT equipment makes up a small part of the CPI basket (2% in Australia), and after adjusting for quality improvements, it has been in deflation for the past two decades. So near-term hardware price rises may simply mark a normalisation of that long-running trend.
