AI Investment Boom Fuels Growth but Adds to Inflation

The artificial intelligence boom is providing a critical lift to the United States economy, but it is also contributing to higher inflation, according to Dean Maki, Chief Economist at Point 72 Asset Management.

In a recent interview, Maki acknowledged that real consumer spending is “clearly slowing,” driven by a marked decline in real wage and salary income growth, which turned negative in the first quarter of the year. He attributed the weakness primarily to a surge in inflation during the first half of the year.

However, when asked about the role of AI, Maki noted it is the singular bright spot in an otherwise decelerating economy.

“If we look at the different sectors, the only thing that’s not slowing in the economy right now is the categories that are related to AI,” Maki said, pointing specifically to equipment spending and intellectual property product spending.

He cautioned that a significant portion of this equipment spending is on imported goods, meaning it does not translate directly into real GDP growth. He noted that real GDP growth has slowed to just 1.2% annualized over the last two quarters “in spite of the fact that AI spending is quite strong.”

While AI is helping avert a sharper slowdown, Maki warned it presents a challenge for the Federal Reserve.

“It is hurting on the inflation side,” he stated flatly. He cited data showing that information processing equipment prices in the PCE price index rose 8.6% year-on-year in the most recent report. “So this boom is translating into higher inflation,” Maki concluded.

The economist characterized the current consumer environment as a notable deceleration, with spending falling from a prior range of 2.5% to 3.5% growth down to a 1.5% to 2% range. He predicted a further slowdown in the second quarter but stopped short of calling it a recession, noting the economy is “not contracting.”