By Jeffry Bartash

High-tech prices fell for years. Now an AI boom is doing the opposite and raising the cost of living.

This barren site in Virginia won't be barren for long: A data center will spring up soon.

One thing the Federal Reserve could always count on to keep inflation low was falling prices for computers, cell phones and other high-tech stuff.

Not anymore.

The rush by giant companies such as Google parent Alphabet (GOOGL) (GOOG), Facebook parent Meta Platforms (META), Amazon.com (AMZN) and Microsoft (MSFT) to develop artificial intelligence and build giant data centers is putting upward pressure on inflation at a time when the U.S. economy can least afford it.

The danger isn't insurmountable, but it's just another barrier for the Federal Reserve as it tries to restore low U.S. inflation for the first time in nearly six years. The AI boom could make an already tough job for the Fed even harder - and potentially force it to raise interest rates.

The U.S. is entering a "stretch in which it is increasingly clear that AI is, on balance, boosting inflation," wrote economists Helen Lao and Avery Shenfeld of CIBC Capital Markets.

Insatiable demand

The effects of machine intelligence are most clearly seen in the prices of computer chips, memory products, servers and so forth. These are the skeletons of AI and the internet.

Buried in the U.S. government's consumer-price index is a category called "computers, peripherals and smart-home assistant devices." This is the best proxy for AI-related prices.

These prices have declined almost every year - sometimes by as much as 16% - based on government records dating to 2006. Consumers and the Fed could always count on technology simply getting better and cheaper all the time.

The only exception was 2021, when the pandemic resulted in millions of people working from home and upgrading their home offices. The surge in demand for high-tech equipment and lack of supply briefly raised prices.

Prices are on track to rise again in 2026 for only the second time. And they could keep rising for a few more years due to a persistent shortage of the building blocks of AI networks, said Shawn DuBravac, chief economist of the Global Electronics Association.

"It's really been unprecedented," he said.

Effects on inflation

The cost of computer-related technology typically found in consumer products such as laptops, cell phones and routers has never been a big and growing part of household budgets - until now.

Just two months ago, Apple (AAPL) said it would raise prices on Macs and iPads by $100 to $500 because of a memory crunch stemming from the AI boom. Prices of iPhones and other cell phones could also rise this year.

Economists estimate higher prices for computer-related equipment could add one- to two-tenths to the rate of annual inflation.

By itself, such an increase might not be a huge deal. Yet the influence of AI goes deeper than that.

Take the construction of data centers vital to the future of AI, not to mention a constantly improving internet and better cellphone service.

These data centers are housed in huge new buildings, stuffed with massive heat-generating computers and cooled by big banks of air conditioning. Companies are spending hundreds of billons of dollars on data centers, and that's driving up the cost of materials needed during construction.

The yearly increase in the cost of materials for industrial construction surged to a postpandemic high of 5.3% in July, underscoring the immense push to build more data centers.

Then there's the so-called wealth effect.

The AI boom has fueled a raging bull market in stocks that's creating a wave of 401(k) millionaires. Newly enriched Americans are bound to spend some of their windfall on new cars, yachts, houses and the like.

Oxford Economics, for instance, estimates the richest 20% of households are now buying more than half of all the new cars in the country. All the demand by wealthier Americans could push up prices for some goods and services.

"AI is not only raising input costs for electronics, but also driving a positive wealth effect that is supporting consumer demand," said Stephen Juneau, U.S. economist at Bank of America

Add it all up and, economists at CIBC say, the AI boom could add as much as four-tenths to the rate of U.S. inflation in 2026.

Caught by surprise

AI inflation is certainly not something the Fed expected.

Only last year, many Fed officials were talking about improvements in productivity tied to AI that could lower inflation in the long run. When workers are more productive, companies can generate more profits and even reduce prices.

Fed officials have now woken up to the inflationary part of the AI story. Last month, influential New York Fed President John Williams said AI was his main inflation worry.

It's not hard to see why. The effects of the Trump tariffs have faded and the Iran conflict will end sooner or later, bringing down oil prices (CL00) (BRN00). The AI boom is going to last a lot longer.

"This is a category that has always helped the Fed achieve its objective of low inflation," DuBravac said. "Now it's putting upward pressure on inflation."

The rate of inflation using the Fed's preferred measure, the core personal-consumption expenditures (PCE) price index, rose at a 3.7% yearly rate in the 12 months ended in June. The Fed is aiming to bring inflation down to a 2% annual rate.

In light of the current circumstances, an increase of four-tenths of a percentage point in inflation due to the AI boom is no small matter.

In a worst-case scenario, economists say, the AI boom could keep inflation at or near 3% this year and possibly force the Fed to raise interest rates. Higher borrowing costs would sock it to home buyers, heavy credit-card users and anyone needing a loan.

"The irony is that, if the Fed does end up hiking rates in 2026, a technology lauded for its potential disinflationary impacts will be one of the culprits," Lao and Shenfeld of CIBC said.

"The productivity boost and cost savings from AI will come later," they added. "The bills are coming now during a massive capital spending spree."

-Jeffry Bartash

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08-15-26 0900ET