Federal Reserve Bank of Chicago President Austan Goolsbee said on Tuesday that inflation is starting to feel like ”aggregate overheating” fueled by spillovers from the artificial intelligence investment boom rather than largely being a byproduct of supply shocks that will pass on its own.
”This is starting to feel like aggregate overheating, that the AI data center cost increases are jumping out of its lane, that prices are going up in spaces that are not just components in data centers and the directly adjacent industries to data centers,” Goolsbee said in a Semafor interview.
”If you start to see more of this spreading into general services, that investment goods are just getting GDP (gross domestic product) growth up faster than potential and generating this kind of spillover inflation, that’s problematic because unlike supply shocks where we tend to assume they’re going to go away on their own in a relatively short period of time, nobody thinks that of overheating demand.”
”It takes a long time for overheated demand to get going, and once it’s going, it’s hard to get rid of that,” Goolsbee said. ”So that’s why the conventional wisdom among economists has been if you see overheating demand, you act decisively and you act quickly to prevent that from rolling into inflation expectations, rolling into people taking for granted that it’s never going to go away.”
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Asked whether the Fed should continue raising interest rates, Goolsbee, who does not have a vote on rate policy this year, said: ”So if inflation remains persistent, then I think it’s clear what the Fed has to do. If we can get some evidence that this tariff inflation is going away, that the oil shock inflation is going away, it’s not too much progress that we need to show, but we need to start showing some progress if we’re going to get back on the kind of rate cutting path that we were on.”
The Fed cut rates three times in 2025 but last month raised rates for the first time in three years in the face of stubborn inflation, bumping its short-term policy rate up by a quarter percentage point to a range of 3.75%-4.00%. Rate futures markets expect it will forego another increase at the coming October 27-28 meeting but will lift rates by another quarter point in December.