AI Infrastructure Capex Pushes Up Neutral Rate, Fed Faces New Short-Term Inflation Pressures
Claire Weston
Tech giants are pouring hundreds of billions a year into AI infrastructure, pushing up the short-term neutral rate. TD Securities warns the Fed may have to delay cuts — or even consider hikes — as the rate-cut window grows more uncertain.
How big is the AI infrastructure bill?
TD Cowen projects major hyperscalers will spend $745 billion on capex this year, rising to more than $1 trillion annually in 2027 and 2028.
By its estimate, these companies' spending will reach roughly 3% of GDP next year — up from under 0.5% in 2020.
This means → in just a few years, a handful of companies went from a rounding error in the economy to a force large enough to move the overall price level.
How does that spending push up prices?
Demand for components used in AI chips and data centers is surging, spilling into memory and storage chips that also go into consumer electronics — heavy demand chasing limited supply drives prices up.
Apple announced this week it will raise iPad and MacBook prices because memory and storage costs have risen — a clear case of inflation passing from infrastructure to consumers.
In plain terms = AI companies are bidding up chip components, and the higher costs eventually reach shoppers buying phones and laptops.
Why can't AI bring inflation down quickly?
EY chief economist Greg Daco describes this as the inherent pattern of technology revolutions: Phase 1 is capital-intensive and inflationary; Phase 2 — when productivity gains kick in — is disinflationary.
Daco said: "As long as we are in the investment phase, we will see these pressures. Over the next one to two years, inflation will gradually pass through to consumers, then fade as investment growth peaks."
This means → adopting new technology, integrating workflows, and training staff all take time. Productivity gains are a multi-year process — no short-term relief.
What is the Fed actually facing right now?
TD Securities head of economics Oscar Muñoz argues both narratives can be true at once — short-term inflation and long-term disinflation are not contradictory, but the Fed is dealing with the former right now.
He said: "AI's enormous capital demands, even if they last only through the build-out phase, are pushing up the short-term neutral rate."
In plain terms = the neutral rate — the interest rate that neither stimulates nor restrains the economy — has been lifted by the AI investment wave. The Fed must decide whether to hike in response; at a minimum, cutting gets harder.
What has the Fed chair said?
Fed Chair Kevin Warsh previously argued AI would boost productivity, lower inflation, and open room to cut rates — but at his June 17 inaugural press conference he did not confirm whether he still holds that view.
Warsh said only that the Fed still has work to do on price stability — a deliberately vague formulation.
This reflects an unresolved debate inside the Fed over AI's inflation impact. If price pressures keep building over the next one to two years, the window for rate cuts may be pushed back further.
Content is for reference only, not financial advice.