While global markets ride the euphoria of AI-driven earnings, a new narrative is emerging among top asset managers: The AI boom itself is becoming a primary engine of inflation.
According to new analysis from Morgan Stanley, Royal London, and Deutsche Bank, the massive capital expenditure by hyperscalers is colliding with resource constraints, potentially forcing central banks to slam the brakes on rate cuts earlier than expected.
🔥 THE INFLATIONARY FEEDBACK LOOP:
1️⃣ The Physical Cost of AI: This isn’t just about software; it’s about hardware and power.
- Demand Shock: Hyperscalers (Microsoft, Meta, Alphabet) are aggressively building data centers.
- The Bottleneck: This creates a scramble for Energy and Advanced Chips.
- Morgan Stanley View: “Costs are going up, not down… there is inflation in chip costs and power costs.” They predict US inflation will stay above the Fed’s 2% target through 2027.
2️⃣ The Market Signals (Cracks Appearing): We are already seeing the impact on margins.
- Oracle: Shares plunged recently as spending soared.
- Broadcom & HP: Warned of margin squeezes due to rising memory chip costs.
- Deutsche Bank Forecast: AI data-center CapEx could hit $4 trillion by 2030, creating structural supply bottlenecks.
3️⃣ The Policy Risk: If inflation re-accelerates, the “Soft Landing” narrative dies.
- Trevor Greetham (Royal London): “You need a pin that pricks the bubble… it will probably come through tighter money.”
- Kevin Thozet (Carmignac): Is stocking up on Inflation-Protected Treasuries (TIPS), warning that inflation risk is “very underappreciated.”
- Mercer: Edging out of debt markets that are vulnerable to an inflation shock.
💡 ANALYST TAKEAWAY: The market is currently pricing in a “Goldilocks” scenario: High Growth + Falling Rates. However, if the AI boom creates a resource-driven inflation spike, the Federal Reserve may be forced to hold rates “Higher for Longer.” This would raise the cost of capital for the very AI projects driving the growth, potentially compressing the P/E multiples of the Magnificent 7.
👇 Portfolio Managers: Are you hedging your Tech exposure with Commodities or TIPS, or is the AI productivity boost deflationary in the long run?