Over the past two years the economy has absorbed three distinct supply shocks: Tariffs (goods prices), war (oil and energy) and the AI infrastructure buildout (electronic components and accessories).
Since April last year, those shocks, along with service sector inflation, have pushed top-line inflation higher.
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The Federal Reserve recently noted that because of AI-related demand, manufacturers redirected RAM and SSD production away from consumer electronics toward lucrative enterprise data centers.
That shift has caused hardware and cloud computing costs to increase, affecting corporate IT costs that will disproportionately impact small and medium-sized firms. The 27.6% increase in production costs is the largest increase in the BLS collection of data going back to 1966.
At the same time, real, or inflation-adjusted, wages and disposable income have declined, which has only fueled the public’s discontent around affordability.
The last of the three shocks—the AI buildout—is the least recognized and understood. One must dig deep to observe how the radical transformation of the economy around artificial intelligence is affecting inflation early into that long-run process.
Inside the June producer price inflation data, the commodities section shows how the buildout of artificial intelligence is contributing to upward pressure on inflation for households and businesses.
Through June over the past year, prices of electronics and accessories rose by 27.6% as demand for those products has accelerated.
While the early discussion around the impact of AI has been on electricity costs and local concerns such as water usage, that conversation will change as the cost of components rises and as the financing needs of the AI community crowd out demand for both public and private projects.
One should anticipate that inside the July report, which will be released on Thursday, and those going forward, wholesale inflation will continue to look challenging linked to AI.
