The rapid construction of AI data centers is creating a huge surge in electricity demand. This strains existing power grids, leading to higher energy prices for consumers and businesses, which represents a significant and underappreciated inflationary pressure.

Contrary to its long-term deflationary promise, AI is currently fueling inflation. The massive build-out of data centers, demand for computer components, and wealth effects from tech stocks are creating a demand shock that outstrips the technology's nascent productivity gains, pushing prices higher.

For the first time in history, AI could create a world where our ability to produce goods and services outstrips our capacity to consume them. This poses a fundamental challenge to traditional economic models built on scarcity and resource allocation.

The ongoing conflict has taken 10% of global oil production offline, a supply disruption of a magnitude unseen by economists in at least 20 years. This is a pure supply-side shock, distinct from demand-side shocks like COVID, creating unique and severe inflationary pressures for the global economy.

The key variable in the current oil crisis is its duration. Because the supply shock is expected to last for quarters, not just months, the long-term drag on economic activity becomes a greater concern for markets than the initial spike in inflation, changing the calculus for policymakers.

Contrary to narratives about excess demand, the recent inflationary period was primarily driven by supply-side shocks from COVID-related disruptions. Evidence, such as the New York Fed's supply disruption index accurately predicting inflation's trajectory, supports this view over a purely demand-driven explanation.

It's the volatility and unpredictability within the supply chain environment—rather than the magnitude of a single shock—that can dramatically amplify the inflationary effects of other events, like energy price spikes. This suggests central banks need situation-specific responses.

For three decades, US power demand was stagnant due to energy efficiency and offshoring. The AI build-out has abruptly ended this era, driving unprecedented ~5% annual growth. This demand shock has created a massive bottleneck in the supply chain for critical hardware, with a new power generation unit ordered today not expected for delivery until 2029.

The ongoing war in the Middle East, particularly its impact on energy prices via potential disruptions like the closure of the Strait of Hormuz, is now the primary factor shaping the global macro outlook. This negative supply shock significantly increases the probability of a global recession.