While the long-term productivity benefits of AI are uncertain, the short-term economic impact is clear. Building massive data centers requires immense physical resources like steel and energy, creating an immediate inflationary boom that contributes to an overheating economy in 2026.

According to analyst Samuel Hammond, AI's first wave will create a "software singularity" that feels more disinflationary than hyper-growth. While knowledge work is automated, real-world bottlenecks like infrastructure and regulation will limit GDP growth, with gains captured as consumer surplus.

A strong argument suggests that robust economic spending combined with weak labor growth points to higher productivity, potentially from AI. Because productivity gains are disinflationary over the long term, this could give the Fed justification to lower interest rates now without worrying as much about current inflation levels.

For 2026, massive capital expenditure on AI infrastructure like data centers and semiconductors will fuel economic demand and inflation. The widely expected productivity gains that lower inflation are a supply-side effect that will take several years to materialize.

For 2026, AI's primary economic effect is fueling demand through massive investment in infrastructure like data centers. The widely expected productivity gains that would lower inflation (the supply-side effect) won't materialize for a few years, creating a short-term inflationary pressure from heightened business spending.

While AI is expected to be disinflationary long-term, its immediate impact could be inflationary. The massive capital expenditure required to build AI infrastructure will significantly increase demand in a fully employed economy before the productivity benefits are realized.

In a high-impact AI scenario, massive productivity growth leads to gluts of goods and services. This causes prices to collapse, creating massive deflation. This deflation acts as a universal pay raise, dramatically increasing everyone's real wealth and purchasing power.

As AI gets exponentially smarter, it will solve major problems in power, chip efficiency, and labor, driving down costs across the economy. This extreme efficiency creates a powerful deflationary force, which is a greater long-term macroeconomic risk than the current AI investment bubble popping.

Just as electricity's impact was muted until factory floors were redesigned, AI's productivity gains will be modest if we only use it to replace old tools (e.g., as a better Google). Significant economic impact will only occur when companies fundamentally restructure their operations and workflows to leverage AI's unique capabilities.