Fed's Cook: AI price pressure is spreading to electricity, water and goods, and productivity won't fix it this year

Federal Reserve Governor Lisa Cook said on Monday that the artificial intelligence buildout is adding to inflation now, and that any productivity payoff from AI will arrive too late to offset it. "I do not expect those effects to arrive in time to offset the broadening inflationary pressure later this year," she said in prepared remarks at Oakland Tech Week.

Cook said she voted with the rest of the committee for this month's quarter-point hike. She put total inflation at an estimated 3.8% in the 12 months to August and core inflation at an estimated 3.4%. On what comes next, she said she "will consider what policy rate may be needed to continue to guide inflation down to our target," with the number and size of any further moves depending on the data.

The distinction that matters

The quick read of the speech is "Fed official blames AI for inflation." That misses the part a borrower should care about. Cook drew a line between two kinds of AI inflation, and said the Fed should treat them differently.

The first is the surge in prices for chips, computers and software. Cook said much of that reflects demand shifting into one sector, which pushes that sector hard against its supply limits, and that it "should resolve on its own." She said fighting it with rates "could be a mistake," because the Fed's tools are too blunt for one industry.

The second kind is the one she is worried about. Data centers use construction labor and energy, which every other business also buys. She said companies have spent only "a small fraction" of $2 trillion in announced data center plans, so more of that demand is still to come. She also said stock market gains tied to AI appear to be feeding household spending.

Her evidence that it is spreading: electricity and water costs are each up around 5% over the past year, "potentially attributable in part to AI," and core goods prices, which were falling slowly before the pandemic, are running above a 3% annual pace so far this year. Those are not tech prices. They are a utility bill and a shelf of ordinary goods, and they are the kind of inflation rate hikes are built to fight.

Who it hits

A business whose biggest variable cost is power and water feels this first. Laundromats are the clearest case: CheckThisBiz lists 30,325 independent laundromats and dry cleaners, with the most in California, New York and Texas. For a shop with a $4,000 monthly utility bill, a 5% rise is $200 a month, or $2,400 a year, before any rate increase on its equipment loans.

Cook also had a more hopeful point for small firms. She cited the Fed's Small Business Credit Survey, which found nearly half of small employer firms are using AI and 71% of those report higher productivity. She said AI tools have made it cheaper to start a business, and that she rejects the idea that only large firms can use them. She was careful to call wider gains "not a guarantee."

The warning in the other direction: if AI pushes unemployment up because workers' skills no longer match open jobs, Cook said the Fed "would have limited tools," since cutting rates to help could add to inflation.

What the bond market is pricing

Traders already expect the Fed to keep going. The 2-year Treasury yield, which tracks expected Fed policy, was at 4.87% on Monday afternoon, against an effective fed funds rate of 3.88%. The 10-year was at 5.18%. On Treasury's official curve, the 2-year closed Friday at 4.81%.

The next inputs on the calendar are job openings on Tuesday and the September jobs report on Oct. 2. For more on how a hike flows into a credit line, see what the hike to a 7% prime rate means for a contractor and Philadelphia Fed President Anna Paulson's similar warning on AI prices last week. Rates are on the markets board.

Sources: Federal Reserve Board, Governor Cook's remarks; U.S. Treasury; CheckThisBiz business counts. The $4,000 utility bill is an illustration, not a reported figure. This is market information, not investment advice.