Chicago Federal Reserve Bank President Austan Goolsbee stated that inflation driven by the artificial intelligence boom is spreading beyond data center components into unrelated sectors, raising concerns about broader economic overheating. Speaking on Semafor's Compound Interest, Goolsbee noted that prices for land, electricity, water, and construction have surged, and he is "increasingly nervous" that this represents "straight, old-fashioned overheating demand."
The Federal Reserve faces a complex challenge as it weighs whether current inflation is driven by external supply shocks or domestic demand. Inflation stood at 3.4% in August, with September figures due for release this week. Goolsbee, who will join the Federal Open Market Committee in 2027, distinguished between inflation caused by Middle East conflicts affecting oil prices and inflation stemming from hotter demand for goods and services. He indicated that if inflation remains persistent, the central bank's response would be clear.
A significant obstacle for the Fed is that its primary tool for curbing inflation, interest rate hikes, may be ineffective against AI-driven spending. Major technology companies such as Alphabet and Meta possess strong cash flows from advertising businesses that can absorb higher debt costs. These hyperscalers are locked in competitive battles that do not appear to be deterred by rising borrowing costs. While Morgan Stanley reported that new AI-linked debt issuance fell in August, suggesting some investor caution, corporate executives remain committed to investment.
Fed Governor Lisa Cook offered a contrasting perspective last month, warning of "some economy-wide pressure from AI-fueled demand" but characterizing the current situation as a shift in demand toward AI-related sectors rather than an increase in overall economy-wide demand. Cook cautioned that using rate hikes to combat sector-specific inflation "could be a mistake."
Goolsbee acknowledged the ambiguity in current data, noting that while the job market remains stable and growth is solid, inflation has not faded as it might if caused by one-time supply shocks like tariffs. He pointed to rising services inflation as evidence that the cause is not primarily oil or tariffs. The economist also addressed the deflationary potential of AI, arguing that the current hype cycle increases the temptation to spend today based on future promises, which contributes to short-term economic overheating.
On the labor market, Goolsbee dismissed predictions of mass unemployment from automation, citing the "lump of labor fallacy." He noted that the average worker has held 13 different jobs by age 50, suggesting a history of adaptation to new technologies like electricity and the internet. While acknowledging a McKinsey report predicting 16 million US workers may need to switch jobs due to AI in coming years, Goolsbee expressed skepticism about reports focusing on low-income workers, as many AI use cases involve high-level knowledge work such as radiology.