The Data-Center Boom Is Sparking a Third Wave of Inflation Demand for memory chips is pushing prices higher. Will AI’s promise of increased productivity come in time to temper that inflation?

(…) The data centers used for AI require sophisticated computing equipment, cooling systems to keep that equipment from overheating, electric and fiber-optic cables and backup generators to prevent power disruptions. Based on announced and planned developments, Van Nieuwerburgh estimates that spending on the AI build-out through 2032 could come to about $8 trillion—nearly five times the market value of the entire New York City property market.

With so much demand, prices are rising for many of the things that go into the AI build-out. And because those things are used for more than just AI, those price increases are spilling over into the broader economy.

Memory and storage chips, for example, are used in a broad array of consumer-electronics products that includes everything from videogame consoles to cars. Nintendo, Microsoft and Sony have all raised prices on devices. Higher price tags are coming to Apple products, too, according to Chief Executive Tim Cook, who told The Wall Street Journal that the jump in costs was unlike anything he had seen “in any area in over 40 years.”

If AI is as revolutionary as many economists predict, it could eventually cool inflation. That is the lesson from past technological revolutions, which boosted workers’ productivity, making it easier for businesses to meet demand without raising prices. Kevin Warsh, now the Federal Reserve chairman, has previously made that case. (…)

Even under an accelerated timeline, economists at UBS reckon it will be at least a couple of years before AI would start helping to lower inflation. (…)

Already, this is beginning to show up in the inflation data. Consumer prices for computer software and accessories were up about 15% from a year earlier in May, according to the Labor Department. There could be more price increases in the pipeline: The Labor Department’s measure of wholesale electronic components and accessories was up 27% from a year earlier last month. (…)

AI is a shock to demand that could persist for years. (…)

In some instances, the AI build-out could also add to labor costs. Wages for workers who are in demand from data-center construction have been picking up: Average hourly earnings for electrical and wiring-installation contractors were up 6.5% in April from a year earlier, which compared with 3.6% for all private-sector workers. (…)

Earlier this year, Goldman Sachs economists forecast that data centers will account for nearly half of U.S. growth in power demand through 2030. As a result, they saw consumer electricity prices rising about 6% annually this year and next.

To be sure, economists don’t foresee the AI build-out fueling anything like the inflation surge the U.S. experienced when the economy reopened following the Covid-19 crisis. Items like smartphones and videogames represent just a tiny fraction of what people spend every year. Even electricity accounts for only about 2.5% of consumer spending, according to the Labor Department.

Instead, it could serve to keep inflation broadly elevated. Economists expect the May reading of the Fed’s preferred measure of inflation, due out from the Commerce Department on Thursday, will show prices were 4.1% higher than a year earlier. The central bank aims to get inflation to 2%—a level not seen in over five years, as a series of temporary-seeming factors pushed prices higher.

“The more these things happen, the more likely it is that people think, ‘Hey, this is a pattern, maybe I shouldn’t expect inflation to come back down,’” said Jón Steinsson, an economist at the University of California, Berkeley.

That is only one inflation story this year. Add the broad demand pressures stemming from

• the US-Iran war pushing governments and companies to hoard resources and inventories to secure supply “just-in-case”.
• worldwide increases in military spending as governments have realized the need for self-defense.

Importantly, these are all urgent spending that are largely price insensitive.

This Yardeni chart (my rectangles) illustrates the ratcheting up in prices for a large set of commodities used in manufacturing …

… translated into sharply higher producer prices (which exclude tariffs) …

… quickly finding their ways into consumer prices …

… compounded by rising import prices (be mindful of the scale, now 5-10%) …

… which have also been ratcheting up significantly. Could we be in a true regime change?

Thankfully, wages are not adding to inflation so far, nor are they subtracting from inflation still in the +3.5% range:

Purchasing managers, in a clear cost-push situation, are easily pushing their output prices up 4.5%. The composite includes both goods and services.

Yesterday, the Richmond Fed released its quarterly CFO Survey which includes firms that range from small operations to Fortune 500 companies across all major industries. Respondents include chief financial officers, owner-operators, vice presidents and directors of finance, accountants, controllers, treasurers, and others with financial decision-making roles.

Financial decision-makers’ outlooks worsened this quarter amid heightened concern over rising costs and prices in the second quarter of 2026. Since the last survey, CFOs added 1.1 percentage points to their firm’s unit cost and price growth projections for 2026.

AI Demand Begins to Justify Massive Cost of Data-Center Buildout

(…) Global AI sales, excluding China, reached $25 billion in the first quarter of 2026, exceeding the industry’s estimated $21 billion in depreciation costs tied to investments in data centers and chips for the second consecutive quarter.

While the milestone suggests that AI companies are beginning to cover the cost of their capital spending, the margins are thin. Depreciation charges still consume more than two thirds of revenue, leaving a small buffer to cover other costs such as power, labor and financing. (…)

Much of the AI boom has been measured from the supply side, through disclosures from public semiconductor companies like Nvidia Corp. and hyperscalers like Alphabet. Demand has been harder to quantify because many of the most important AI labs, including OpenAI and Anthropic, remain private.

Generative AI revenue, excluding China, reached $110 billion over the past 12 months and is scaling three times faster than any previous information technology wave including the internet, mobile applications and the cloud, according to the report.

The figures are based on a dataset that Exponential View built tracking AI spending across more than 1,000 companies. They used sources including company filings, executive statements, press reporting and cloud-provider disclosures, and then adjusted the figures to avoid double-counting between layers of the AI supply chain.

The analysis assumes a six-year depreciation life for IT equipment including graphics processing units, or GPUs, the chips used to train and run advanced AI models. Some investors argue this is optimistic given the rapid pace of chip innovation, which can render older hardware less valuable within a few years.

If GPUs lose economic value faster than assumed, companies could face higher depreciation charges, asset writedowns or earlier replacement costs. Michael Burry, the investor known for betting against the US housing market before the 2008 financial crisis, has described understated depreciation as “one of the most common frauds of the modern era.”

However, data in the report suggests older chip models are not collapsing in value. The rental price for an hour of access to Nvidia’s H100 chip remains almost 80% of its launch level. “Even into its fourth year, it is completely in demand,” Azhar said, noting it’s become more expensive over the last year, as demand for AI compute outstripped supply of Nvidia’s new Blackwell chips.

That chimes with comments from Matt Garman, the chief executive officer of Amazon Web Services, who said in February the company had not retired six-year-old Nvidia A100 servers due to continuing demand.

The report also shows more users are moving toward open-weight and Chinese AI models such as DeepSeek. Data from OpenRouter, a platform that gives developers access to multiple AI models, shows the share of tokens requested from Google, OpenAI and Anthropic models fell to 33% in June 2026 from 72% a year earlier.

Azhar said that reflects power users moving toward cheaper and faster models for simpler tasks. (…)

That does not necessarily spell trouble for leading foundation-model companies, he added, but it raises the bar for charging higher prices. They will need to compete with “additional services, with more lock-in, and with all of the things that allow you to charge a premium,” he said.

• Micron Delivers the AI Reassurance Wall Street Was Craving

The US memory-chip maker released a quarterly sales forecast that crushed estimates, signaling its growth run remains strong. The results should help rebuild investor confidence following a tech selloff sparked by worries over AI.

How good was the report? Very.

• Revenue will be roughly $50 billion in the fiscal fourth quarter. Analysts had estimated $43.2 billion.
• Profit will be about $31 a share, compared with a projection of $25.31.
• Third-quarter earnings increased to $25.11 a share. A year ago, they were $1.91.
• Adjusted gross margin more than doubled.

Perhaps most importantly, Micron said it has secured 16 strategic customer agreements, which average three years in length. That suggests it can mitigate the boom-and-bust cycles that have plagued the memory-chip industry.

China Issues New Energy Plan at Transition Inflection Point

China published a five-year plan for building a new energy system, aiming to map out a way forward for a sector that’s starting to run up against the constraints of its rapid pivot toward clean electricity.

Every half-decade, Chinese leaders publish a five-year plan outlining economic and societal goals, and then follow it up with several sectoral schemes with more detailed targets and strategies. This year, the broader plan came out in March, and sectoral plans have begun trickling out in recent weeks, including ones on jobs and urban renewal. (…)

It called for China to peak its coal and oil during the 2026-30 period, double non-fossil fuel energy over the next decade, and focus on developing technologies like hydrogen and nuclear fusion. It also sought to make progress on a major gas pipeline from Russia, and boost capacity of generating technologies like nuclear, offshore wind and pumped hydro storage. (…)

US FLASH PMI

Faster growth in June, but lower employment and elevated price inflation

June saw US businesses report the largest rise in output since January, according to provisional PMI data. The headline flash S&P Global US PMI Composite Output Index rose from 51.5 in May to 52.2. While the latest reading signals an improvement in the growth trajectory from March’s two-and-a-half year low, the expansion remains subdued compared to the start of the year, prior to the outbreak of the war in the Middle East.

The June survey also pointed to an ongoing bifurcation of the economy, with sluggish service sector growth contrasting with an increasingly solid manufacturing expansion.

Although notching up its largest increase in business activity since February, buoyed in some cases by the soccer World Cup, the service sector again reported only a modest increase in both output and new orders. Service providers often cited elevated prices, higher interest rates, and low confidence among both business and consumer customers.

In contrast, manufacturing output grew at the fastest rate since July 2021 in response to the largest rise in new orders for just over four years. However, the manufacturing expansion was again partly attributable to demand being temporarily supported by the front-running of potential supply issues and price hikes associated with the war.

Input buying by factories rose at a pace not seen since September 2021, and inventories of inputs were accumulated in June at the fastest rate in the near-two-decade survey history barring only the rise following the announcement of tariffs in 2025.

Exports of both goods and services continued to fall.

Supply chain delays grew more widespread in June. Supplier delivery times lengthened on average to the greatest extent since August 2022, commonly linked to shipping disruptions due to the war in the Middle East as well as tariffs.

Average input prices meanwhile rose sharply, the rate of inflation dipping from May but nonetheless the third-highest recorded since the start of 2023. Although manufacturing input cost inflation moderated from May’s recent peak, it was the second-highest for almost four years. Services input cost inflation meanwhile edged up to a six-month high.

Average prices charged for goods and services rose at a pace unchanged on that seen in May, which had been the highest since July 2025. Cooler, but still elevated, goods price inflation was accompanied by an increase in service sector selling price inflation to an 11-month high.

Employment fell for a second month running in June, and for the third time in the past four months, as companies commonly continued to focus on cost reduction amid high input prices and concerns over the outlook. While only a modest drop in services jobs was reported, manufacturing headcounts were cut at the fastest rate since the COVID-19 lockdowns of early 2020.

Companies’ expectations for output in the year ahead improved in June to the brightest since February, lifting in both manufacturing and services. Improved outlooks were partly linked to hopes of an easing of war-related disruptions and price pressures. In both cases sentiment nonetheless remained well below long-run averages to point to historically subdued business confidence overall, often blamed on uncertainty over the economic outlook amid concerns relating to the ongoing impact of the war in the Middle East and government policies such as tariffs.

Chris Williamson:

“The survey signals that current output levels are consistent with the economy struggling to grow much faster than a 1% annualized rate in the second quarter.

“The service sector continues to grow at an especially subdued pace, reflecting push-back from customers over high prices amid low levels of consumer confidence in particular. While there is better news from the manufacturing sector, we remain concerned as factory growth continues to be temporarily buoyed by inventory building amid supply fears. (…)

“Most worrying was the further fall in employment, notably in the manufacturing sector. Factory job cuts are running at the highest since 2009 if the pandemic is excluded, reflecting concerns over the sustainability of the recent upturn in demand alongside worries over the escalating cost of raw materials.” (…)

 

The Narrative in Markets Is Changing

The narrative in markets is changing from “lower oil prices mean lower inflation” to “lower oil prices mean more demand in an already overheating economy, which means higher inflation.”

Driven by the strong April CPI, hot May non-farm payrolls and a hawkish Fed, the market narrative now suggests that the reopening of the Strait of Hormuz will further overheat the economy, forcing the Fed to raise interest rates soon.

South Korea stock volatility hits record high amid AI doubts

(…) Volatility in the Kospi hit a record high, with moves in the market intensified by the growing popularity of single-stock leveraged exchange traded funds among retail investors.

“These single-name leveraged ETFs just amplify volatility,” said Song Zhe, a senior investment specialist at BNP Paribas Asset Management. 

South Korea introduced leveraged ETFs tied to popular stocks such as Samsung and SK Hynix in late May. On Monday, Lee Chan-jin, head of the Financial Supervisory Service, expressed regret for an ETF rollout that he said had been done “in a hurry”. (…)

John Authers:

(…) Korean regulators recently allowed similar single-company ETFs in Korea — and spooked the market this week by publicly regretting doing so. It’s hard to see why anyone would ever want a double-leveraged ETF, particularly in a company already prone to big movements.

Leverage might help add juice to a sure-fire, low-return investment to make it worthwhile — but making an already risky bet even more volatile is plain dumb. In this case, if the ETF is working according plan, holders should have seen yesterday’s 13.2% fall for Hynix translated into a 26.4% loss.

No wonder Korea’s regulators are kicking themselves for allowing them, while investors in the rest of the world are alarmed that the plunge could feed on itself.

 

Once an ETF is launched, people will tend to use it. The financial industry will take every opportunity to sell it — but if your investment case relies on new suckers being lured in to buy ETFs, it’s probably not a good one. For a recent case in point, Bitcoin — once the ultimate anti-establishment investment — went on a massive rally after big institutions persuaded the Securities and Exchange Commission to license spot Bitcoin ETFs. That is now well and truly over:

The events in Korea predictably had their greatest impact on US momentum stocks, which have been winning of late. The ETF tracking the S&P 500 momentum index had its second-worst session since Liberation Day last year, but that has to be viewed in the context of the stunning rally that had preceded it:

The SOX semiconductor index, even after Tuesday’s selloff, remains far ahead of its 200-day moving average. Indeed, it’s still more overbought than at any time since the peak of the dot-com boom:

Good news: So far, this isn’t even a correction. Worse news: That leaves much space for over-levered investors to suffer losses that they cannot afford. That was the risk that preoccupied traders from Seoul to Manhattan. And as the market is over-extended, bringing with it the risk of a big reaction to bad news, it’s not surprising that people wanted to get out ahead of the next opportunity for genuine news on the fundamentals. (…)

Not a Korean invention: there are 478 Single Stock ETFs in the US with total AUMs of $56.4B. You will not be surprised to learn that the bulk of the money speculates in tech stocks.

What you should know (my emphasis):

• “These funds are designed as tactical trading instruments, allowing investors to express a high-conviction, short-term view on a specific stock’s direction.”
• “The key to these structure is the use of financial derivatives. Rather than simply holding the underlying stock, these ETFs utilize swap agreements, options and other contracts to achieve their stated investment objective, such as providing twice (2x) the daily return of the stock or the inverse (-1x) of its daily return. This derivatives-based approach allows the fund to deliver leveraged or inverse exposure without the investor needing to directly manage the complexities of margin or options.”
• “It is critical for investors to understand that these ETFs are rebalanced daily. This means their performance over periods longer than one day can differ significantly from the stated multiple of the underlying stock’s performance due to the effects of compounding. For this reason, they are intended for active, sophisticated investors who understand their mechanics and risks. This innovative structure provides a powerful tool for traders, offering access to leveraged and inverse strategies through a regulated, transparent, and accessible ETF.”
• “Single-stock ETFs are significantly more expensive than standard index funds, often carrying net management fees around [or more than] 1.10%.”

POOL SIDE CHATTING

Readers of this blog are very smart.

Barry sent me a link to a June 23 NYT piece Trump Blames Vandals for Reflecting Pool Problems. Internal Records Tell Another Story, presumably as evidence that Trump simply lies when things don’t turn positive for him. “Not only does he lie, he also has others in his admin to repeat and amplify the lies” Barry added while highlighting what he considers critical to his assertions:

President Trump says the peeling blue coating and algae blooms that mar his $16.4 million renovation of the Lincoln Memorial Reflecting Pool are the fault of vandals working with “knives” in the “dark of night.”

[A spokeperson from the Interior Department added that it was “vandalism by leftist activists.”]

But government documents obtained by The New York Times show that while National Park Service workers found two cuts in sections of foam between the pool’s expansion joints, those were not directly related to the “American flag blue” coating that is now peeling, or to the algae that has turned the pool a bright shade of green. (…)

While a June 9 report by the U.S. Park Police described the cuts as “razor blade slashes” made along a 20-foot-long stretch of the foam, the administration has yet to present evidence supporting that assertion. The documents reviewed by The Times described them as two 171-foot blade cuts but did not address how they were made.

By June 16, workers had noticed that chunks of blue sealant that covered the pool’s bottom were peeling and floating to the surface, the documents show. (…)

But on June 15, Mr. Trump was still declaring the renovation a success, telling reporters that “I’m very good at building things and constructing things.” (…)

On Tuesday, the president said on social media that six people had been arrested, and seven others had been cited, for slashing the pool’s sealant with a “sharp knife or razors.”

“It was purposefully and criminally done, and somebody had to work very hard, probably in the dark of night,” he wrote.

Mr. Trump also told reporters on Monday, without offering evidence, that vandals had poured fertilizer into the pool to feed the algae.

Neither the Interior Department nor the White House would provide charging documents, citations or the names of anyone arrested. They did share the Park Police incident report, which said any suspect or suspects were unknown. The report also did not mention any damage to the pool’s blue sealant, nor did it describe any vandals dumping fertilizer. (…)

Though Mr. Trump claimed vandals dumped fertilizer in the pool, his administration refilled it with D.C. municipal water, which is treated with phosphate to keep lead from leaching out of old pipes. But phosphate also provides nutrients for algae, as do droppings from ducks swimming in the pool. (…)

Anthony Flett, the chief executive of U.S. Coating Specialists, a Florida-based company that specializes in waterproofing coatings, reviewed the documents at the request of The Times. He wouldn’t dismiss vandalism, but said it appeared that the sealant may be peeling off because not enough material was applied. (…)

“There’s people in the pool industry whose whole life is polyurea, and they should have been called in,” Mr. Flett said. “They should have been there to watch over the project to make sure that these failures weren’t prevalent. I think it was just done too hastily.” (…)

Barry said “how can we Americans, or anybody else, know what is true or false from this administration, particularly when reading about the US-Iran negotiations, when we see Trump shamelessly lying about simple pool stuff to save his own skin?” He added “when Trump or Vance say Iran agreed to something and Iran denies it, who’s to believe after the blatant lies about the DC pool?”

But Barry, you should know that Trump has already dismissed such articles as “fake”, particularly the NYT’s, a “true enemy of the people” that “freely spreads lies and purposeful misrepresentations.”

Maybe even this whole Pool Side Chat is fake and full of lies.

Except the first seven words.