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 Federal Reserve Chair has explicitly stated that current inflation above the target is driven by tariffs on goods. This is being masked by disinflation in the services sector, suggesting that underlying, broad-based inflationary pressures in the economy are actually quite weak.

It's misleading to cite a single inflation number. There's massive deflation in globally competitive sectors like electronics (touched by China and the internet). Simultaneously, hyperinflation exists in state-regulated, protected domestic sectors like US education, healthcare, and housing.

The massive capital expenditure for AI development is increasing demand and prices for components like software and computer hardware. This tech-specific boom is creating tangible inflationary pressure that is resistant to the Fed's current monetary policy, which has so far failed to slow it down.

Even with a mild Core CPI report, a sharp increase in the Producer Price Index (PPI) for intermediate goods indicates that cost pressures are building in the supply chain. These will likely translate to higher consumer prices in the coming months.

A measure of "market-based core PCE services ex-housing" inflation is accelerating. This niche metric, which strips out imputed prices and volatile sectors, suggests that core economic activity is generating persistent inflation, challenging narratives focused solely on energy shocks or trade wars.

Focusing on falling oil prices as a sign of easing inflation is simplistic. Leading indicators like the sectoral breakdown of payrolls and a core PPI that has jumped from a 3% to a 5% handle in six months suggest a stickier, more concerning inflation outlook for the Federal Reserve.

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.

"SuperCore" inflation, which measures services excluding energy and shelter, is a key metric for gauging underlying price pressures tied to the labor market. Currently at 2.8% year-over-year, its moderation is seen as a positive sign that inflation is heading in the right direction.