In response to the widely held belief that the productivity benefits from AI should already be driving down prices, Fed Chair Jerome Powell stated on Wednesday that the AI-fueled data center boom is contributing to inflation.
Powell stated at a news conference after the Fed decided to keep interest rates unchanged, “In the short term, what’s happening is we’re building data centers everywhere, and that’s actually putting pressure on all kinds of goods and services that go into building these things.” “So that’s probably driving up inflation.”
The remarks were made in response to a query about whether optimism about AI-driven productivity was reflected in the Fed’s own long-run growth estimates, which officials raised from 1.8% to 2%, and whether this should result in lower rates and inflation.
At least not yet, Powell didn’t agree with the reasoning. According to him, the demand side—the enormous physical infrastructure needed to power AI—is outpacing any productivity gains, thus AI will probably raise rather than lower the neutral interest rate in the near future.
“You’re not looking at something that would immediately call for lower rates or lower inflation in the near term,” he stated. He said that for the time being, the disinflationary advantages of AI are only theoretical.
His statements may act as vindication for Americans feeling squeezed by the data center growth. Goldman Sachs warned this month that consumer electricity rates could rise 6% between 2026 and 2027, owing in part to the strain data centers are putting on the power system. Utilities proposed a record $31 billion in rate hikes in 2025, more than doubling the previous year, with lower-income consumers carrying a disproportionate share of the costs.
Data center building is actually slowing down, according to a different Wood Mackenzie research this week, not because demand has decreased but rather because it is so high that the grid cannot keep up. Of the projects in the pipeline, just one-third are actively being developed, and many may never be constructed.
Powell stated that the Fed has been observing “meaningfully higher productivity” for a number of years and that he expects it to continue: “I never thought I’d see this many years of really high productivity.”
“The effects of generative AI haven’t really started to show,” he stated. “And that should undoubtedly contribute. However, the question of whether demand is expanding more quickly or more slowly than supply is empirical. He added the four-word statement, “We just don’t know,” which he would repeat more than a dozen times during the press conference.
