Fed's Cook warns AI and oil prices will continue to push up inflation

Federal Reserve governor Lisa Cook said Monday that she believes AI and higher oil prices will continue to push up inflation in the coming months, but that any further interest rate hikes would be contingent on economic data.

"I expect to see continued pressure on inflation from the AI build-out … and from the pass-through of higher oil prices and supply chain disruptions associated with the conflict in the Middle East," Cook said in a speech in Oakland, California.

She noted that the job market appears well-positioned to handle an increase in rates.

Looking ahead, Cook said she will consider what policy rate may be needed to continue to guide inflation down to the Fed's target.

"The number and magnitude of any future adjustments will be informed by observations of the economy's reaction to our policy actions thus far and the inflation and labor data over the coming months," she said.

Cook warned that while AI is contributing to inflation in specific sectors right now, demand for the technology could ripple through the broader economy.

Cook pointed out that prices for AI-related goods — such as chips, computers, and software — have surged, reflecting the demand in those sectors, not economy-wide. She cautioned that trying to quell inflation in specific sectors stemming from AI with rate hikes would be a mistake.

"Attempting to fight sector-specific inflation with monetary policy could be a mistake," Cook said. "Our tools are too blunt to target narrow sectors, and addressing relative price shifts is not our role."

However, she said she does see some "economy-wide pressure" from AI-fueled demand, citing data center investments that rely on construction labor and energy and are widely used across many other sectors. As a result, increased AI investment could introduce price pressure to those other sectors. And with even more investment in the pipeline, she said, that could increase demand even further.

Signs in the inflation data suggest the pressure may be broadening, Cook added, pointing to electricity and water costs that have risen around 5% over the past year. She also noted core goods prices are running over 3% this year.

She also said a large portion of the rise in stock prices over the past few years can be attributed to enthusiasm about AI, and that added wealth appears to be feeding through to household spending.

"This introduces the risk that, even as inflation in the narrow AI sector moderates, new and more broadly based price pressures may take its place," Cook said.