Economist: AI Infrastructure Boom Could Boost Inflation in the Short Term, Limiting Fed's Room for Interest Rate Cuts

June 1, Apollo Global Management’s chief economist Torsten Slok warned that the early-stage frenzy around artificial intelligence infrastructure investment could stoke inflation, crimping Federal Reserve Chair Kevin Warsh’s room to cut interest rates. Slok pointed out AI data center construction is driving surging demand for semiconductors, electricity, and labor. Major U.S. tech firms plan to spend roughly $725 billion on capital expenditures this year building AI-related infrastructure. While AI is expected to boost productivity over the long term, the massive near-term investment is pushing up costs and price levels—“rather than curbing inflation, it’s intensifying it,” he said. U.S. inflation remains well above the Federal Reserve’s 2% target. Data showed the April PCE price index climbed 3.8% year-over-year, hitting its highest level since 2023. Fueled by the AI investment boom, rising energy costs, and tariff pass-through effects, market expectations for the Federal Reserve’s policy path are shifting. Compounding those concerns, Iran announced it’s halting indirect talks with the U.S.—sparking fears that an escalation in Middle East tensions could send oil prices and inflation even higher. On Monday, WTI and Brent crude both rose more than 6% intraday, the U.S. 10-year Treasury yield climbed to 4.51%, and the 2-year Treasury yield hit 4.09%. Interest rate swap markets now fully price in the expectation of at least one Federal Reserve rate hike before March 2027, with around a 50% chance of a hike as soon as October this year. Analysts caution that if energy prices stay elevated and AI capital spending keeps expanding, the Federal Reserve will face an even steeper inflation challenge in shaping future monetary policy.