Episode summary
Is AI Making Inflation Harder to Beat?
Wall Street Week
· · 10 min · Guests: Loretta Mester
Summary
Loretta Mester says the latest CPI was better than earlier readings, but inflation is still a problem because it has remained above the Fed’s 2% goal for more than five years. She argues the key question is whether current interest rates are restrictive enough, and says the FOMC may ultimately need to consider raising rates a bit more if inflation does not keep easing. Core services excluding housing, in her view, remains a troubling sign because it has started moving higher again.
She also says AI is a near-term inflation pressure, not a cure. The heavy investment flowing into AI is pushing up prices for components, even if AI could become disinflationary later by lifting productivity. She says that benefit is not likely to arrive soon enough to matter for the current inflation problem.
On growth and the labor market, Mester says the Fed has room to stay focused on inflation because employment looks broadly steady and unemployment remains low, even if payroll gains have slowed. She also says recent swings in rate-cut and rate-hike expectations make sense given tariff shocks, the Iran war, oil-price moves, and the arrival of Chair Kevin Warsh, which together have made the outlook more uncertain.
Key takeaways
- Mester says inflation has been above the Fed’s 2% target for over 5 years, so the problem is not solved by one cooler CPI print.
- She says the FOMC may need to raise rates a bit more if policy is not restrictive enough to bring inflation down.
- Mester flags core services excluding housing as a key concern because it has been moving up again.
- She says AI spending is currently inflationary because component prices are elevated, even if AI may eventually become disinflationary through higher productivity.
- Mester says the labor market looks broadly stable, so the Fed can keep inflation as the main focus for now.
Notable quotes
“inflation's been above the 2% goal of the Fed for over 5 years. So we do have an inflation problem”
“I think the question the FOMC is going to have to ask itself is, do we need to raise interest rates a bit in order to add restrictiveness to the economy to bring inflation down”
“I think there's a good case for saying we need higher interest rates, because it's hard to argue that where we are today is very restrictive on the economy”
“I do think right now it's an inflationary issue. And the question is how long will that last”
“I think there's better recognition that even though we're hoping that we're at a point where interest rates are enough to get inflation back down to 2 percent, that projection may not come to pass”
How the episode opens
We start with the global concern over inflation in a week that gave us new CPI numbers and Chair Warsh's first testimony on Capitol Hill. Are we facing higher long-term interest rates? How much of it comes from that AI rush?
And what does it mean for Western economies if we can't get back to that magical 2 percent target? Loretta Mester was president of the Federal Reserve Bank of Cleveland and now holds positions at both Penn's Wharton School and Princeton. We got new inflation numbers out this week, which were not as bad as they had been in the past.
But there has been a growing concern, I think, about longer-term inflation. Where are we? -Well, inflation's been above the 2% goal of the Fed for over 5 years.
So we do have an inflation problem. I think it remains to be seen whether where interest rates are today are enough, right, to actually move inflation back down. I think the question the FOMC is going to have to ask itself is, do we need to raise interest rates a bit in order to add restrictiveness to the economy to bring inflation down?
And I think they don't know that yet. I think the tone is getting more that we're impatient with this inflation. But I think they're going to wait for some more data before they make up their mind that they're going to need to raise rates.
I think there's a good case for saying we need higher interest rates, because it's hard to argue that where we are today is very restrictive on the economy. Westin: And, particularly, maybe because the headline number came down really largely because of fuel. -Yeah, that's right.
I would say, though, that overall, the report was a pretty good report, even when you look at the components.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- ai investment
- inflation
- cpi data
- fed policy
- services inflation
Watch the episode
Watch “Is AI Making Inflation Harder to Beat?” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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