The surge in spending on artificial intelligence is fueling inflation across supply chains and labor markets, but analysts at CIBC Capital Markets highlight two potential scenarios—one optimistic and one pessimistic regarding AI—both of which could lead to lower prices by the end of 2027.
CIBC’s chief economist, Avery Shenfeld, noted that the price pressures stemming from AI infrastructure development are evident in rising freight rates, higher costs for construction materials, increased prices for memory chips that translate into higher personal computer costs, and tightness in the labor market. These factors, he said, currently outweigh the labor cost savings that AI tools have delivered so far.
Shenfeld pointed out that companies implementing AI for their workforce have seen “mixed results: some have gained from time savings, while others have found these benefits offset by rising token costs.”
Inflation has already prompted a reassessment of monetary policy. Federal Reserve Chair Kevin Warsh, who last year cited AI-driven productivity gains as a reason to cut rates, is now considering the possibility of raising them, with the AI spending boom being one of the contributing factors, according to CIBC.
If AI optimists are correct, another year of technology adoption should begin to yield labor cost savings as businesses direct AI usage toward areas where productivity gains exceed token costs, CIBC believes.
Reduced hiring or layoffs in roles made redundant by AI will ease wage pressures. The pace of spending on data center construction and power plants should slow, potentially stabilizing chip prices, and a shift toward imported equipment rather than domestic construction could relieve pressure on the U.S. economy’s production capacity.
Any significant reassessment of the AI investment thesis in capital markets could cut project budgets, reduce aggregate demand, and ease supply chain tensions.
A sufficiently severe stock market correction tied to AI disappointment could also curb consumption and prompt the Fed to ease financial conditions.
CIBC warns that the timing of either scenario remains “highly uncertain.” Financial markets could continue to fuel an acceleration in AI project spending for “another year or two” if return-on-investment expectations stay high, pushing major cloud service providers to expand capacity and sustaining pressure on supply chains.
“While there are solid reasons to believe that AI-induced inflation will prove temporary, and the Fed is betting on that outcome, the regulator cannot afford to stand still if core inflation remains too high in the interim,” Shenfeld stated.
CIBC’s baseline scenario assumes no Fed rate hikes this year, but the bank notes that this forecast remains dependent on incoming data on economic growth and inflation. Any rate hikes driven by AI could later be reversed if disinfection materializes, the bank adds.
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