Beyond existential concerns, Wall Street analysts are highlighting a more immediate risk: AI-driven inflation. The massive, price-insensitive spending on data center construction is causing construction worker wages to spiral and increasing energy consumption, which could flow through to generalized inflation across the economy.

The AI boom is a double-edged sword for the economy. While driving growth through massive investment in data centers, it's also a key source of inflation. Prices for essential computer equipment and software have surged 10% year-over-year, directly feeding into broader price pressures.

The massive investment in AI data centers is pulling construction resources like labor and materials away from other sectors. This increases costs for projects like multifamily housing, making them financially unviable and effectively crowding them out of the market.

AI cannot solve 'Baumol's disease'—the stagnant productivity in labor-intensive services like plumbing and electrical work. In fact, the AI build-out worsens it by consuming scarce skilled labor for data center construction and maintenance, driving up costs for these essential services for the rest of the economy.

The AI boom is causing a tangible 'crowding out' effect in the real economy. Fed President Schmid confirms hearing 'every day' from businesses that the data center build-out is creating intense competition for physical commodities like steel and copper, as well as for labor and equipment, directly impacting other industrial sectors.

The huge scale of AI data center construction, requiring thousands of skilled laborers in one location, creates a 'crowding out' effect. Local businesses in places like Abilene, Texas, cannot compete for labor like HVAC technicians, leading to shortages and potential inflationary pressures on regional economies.

While costs for essentials like copper and electricity are rising, cash-rich hyperscalers (Google, Meta) will continue building. The real pressure will be on smaller, capital-dependent players like CoreWeave, who may struggle to secure financing as investors scrutinize returns, leading to canceled projects on the margin.

While AI is a disinflationary force via productivity, its development requires a massive physical build-out of data centers and chips. This creates huge demand for real-world commodities and resources, exerting significant inflationary pressure that complicates the macroeconomic picture for policymakers.

While AI is expected to be deflationary long-term, the current rapid and large-scale investment in data centers is pressuring supply chains for chips and other inputs. This demand shock is causing prices for hardware, software, and electricity to rise, adding a new inflationary element for the Fed to consider.