The AI Boom Is Helping Power The U.S. Economy. But Cleveland’s Fed President Says It Could Also Fuel Inflation.

Cleveland Fed President Beth Hammack said that “insatiable” demand of AI infrastructure is fueling inflation. Should that scenario continue, and other factors putting pressure on prices don’t let up, policymakers could raise interest rates, she told CNBC.

“We’ve got inflation that’s too high, and it’s been too high for the past five years,” Hammack said. “When I look at policy, if that continues, it may mean that we need higher interest rates to bring inflation back down to target.”

She went on to focus on AI spending, saying that manufacturers “will pay any price” to build data centers as they “need things built yesterday.”

“When I look broadly, particularly around large companies, I’m not seeing a lot of restraint in the economy. I’m not hearing from these businesses that interest rates or credit spreads are a reason why they’re holding back from investment and growth,” Hammack added.

The outlet noted that Hammack’s remarks about inflationary pressures in the short-term stand in contrast with others from Fed Chair Kevin Warsh, who recently said that productivity gains will decrease the cost of labor and end up being disinflationary.

Other Fed policymakers have also expressed concern about inflationary pressures. Chicago Federal Reserve President Austan Goolsbee said last week that inflation remains the central bank’s biggest concern despite some improvement in services prices as policymakers continue to assess the impact of elevated energy costs on the U.S. economy.

The remarks came after fresh inflation data reflected the lingering effects of higher oil prices during the recent Iran conflict, which pushed up transportation and energy costs across the economy.

Speaking in an interview from the Chicago Board Options Exchange trading floor on Thursday, Goolsbee said recent data offered “a little bit of improvement” in services inflation but stressed that overall inflation remains above the Federal Reserve’s comfort level, CNBC reported.

“You have seen now little bit of improvement on this services inflation, and I’ve been identifying that as something that we would want to see,” Goolsbee said. “But right now, as between the two sides of the Fed’s mandate, the inflation side and the job market side, clearly the problem’s on the inflation side.”

His comments came a day after Commerce Department data showed that the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, remained elevated in May.

Core PCE inflation, which excludes food and energy, rose 3.4% from a year earlier, its highest reading since October 2023, while headline PCE inflation reached 4.1%, driven in part by higher energy prices during the recent Middle East conflict, according to Reuters.