Does AI Need To Break To Contain Inflation?

PodcastStreet SignalsKayla SaderSep 17

Inflation readings show pressure in technology prices, core services, transportation, and commodities, while the guest says commodity-driven firmness could still allow an October pause after a September Fed hike. The discussion also weighs AI's role in capital demand and inflation against the possibility that higher rates strain consumers and fail to curb investment. In markets, rate-hike pricing has risen, European breakevens are climbing, and the guest sees limited room for broad equity diversification. She also flags potential upward pressure on long-term yields and says the dollar may remain firm for now, though credibility concerns could eventually weigh on it.

Inflation Monetary Policy Interest Rates Artificial Intelligence Market Valuations Currencies

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Key Takeaways

The guest links AI to both inflation and stronger capital demand: computer software and accessory prices rose 25% over the past year, while some AI companies have revenues secured years ahead and operating cash flows exceeding CapEx. She says the shift toward AI-driven investment and growth could imply a higher r-star, though she has not seen the Fed task force’s results.

The guest points to heat in transportation and commodities alongside a broad 51-basis-point rise in core services ex shelter, while food and several other categories were closer to seasonal norms. The host says inflation data lifted the probability of a Fed hike to about 90% from 60%; the guest adds that if firmness is primarily commodity-driven, a September hike could still be followed by an October pause.

The host says inflation swaps across seven large economies reached their highest level since the post-pandemic period as dispersion fell, while the guest reports rising European and UK breakevens. She says recovered growth expectations have supported hawkish central-bank pricing, but considers pricing for five Bank of England hikes and four additional ECB hikes potentially excessive, with high European gas prices and low storage posing added constraints as winter approaches.

The host argues that U.S. nominal growth of about 6.6%, versus long-term averages near 5.8%, helps explain 10-year nominal rates. The guest says long-end yields also reflect term premiums and fiscal stances, sees scope for them to trend higher over the medium to longer term, and warns that weaker growth alongside increased issuance could be problematic.

TECHNOLOGY

AI Price Pressure — The guest reports that computer software and accessory prices rose 25% over the past year, the largest increase on record for that component. She says AI is making its way into inflation.

“Now on the AI front, there were certainly signs that AI is making its way into inflation…”—

ECONOMY

Inflation Drivers — The guest says September inflation was running above normal, with daily sector measures pointing to transportation and commodities as sources of heat. Food, household equipment, healthcare products, and electronics were closer to seasonal averages. If the Fed hikes in September, she says, the pattern could still justify an October pause if firmness is primarily commodity-driven.

“And so far, what I do see is inflation is trending above normal for September. The next question, though, is this all just energy? Is this all just commodities?…”—

Core Services — The guest says core services ex shelter rose about 51 basis points, its largest increase since January, with gains broad across components. She says this strengthened her conviction that the Fed would act that week.

“So super core came in particularly hot. So core services ex shelter was around 51 basis points. That's the largest increase since January…”—

Lodging Contribution — The guest says lodging away made a larger-than-normal contribution to shelter inflation. She argues that the increase supports the view that consumers remain resilient.

“Now the second point as well, shelter. Shelter was still pretty firm, especially lodging away. So lodging away had a bigger impact than normal within the shelter component…”—

MARKETS

Fed Hike Pricing — The host says a Fed rate hike was about 90% priced, up from 60%, attributing the repricing to the latest inflation data.

“The Fed is gonna have met by the time this goes out. Presumably, there's a rate hike coming at something like 90% priced…”—

European Breakevens — The guest says breakevens have begun rising in Europe and the UK, reflecting uncertainty about central banks' ability to deliver price stability. Questions remain about growth's durability and whether central banks could hike if growth deteriorates.

“Now in Europe, in The UK, places like that, we have started to see signs of breakevens are starting to rise more…”—

AI Trade Exposure — The guest says the AI trade has benefited the S&P and retirement accounts, so a break in the trade would be painful. She also says higher rates are straining some consumers, citing H8 data and consumer lending that is starting to struggle.

“It's been great for the S and P. It's been great for retirement accounts. If that trade stops working, it's going to be painful…”—

FORECASTS

Long-End Yields — The guest says central banks have limited control over long-end yields because yields also reflect term premiums and fiscal stances. She sees scope for long-end yields to trend higher over the medium to longer term. Weaker growth combined with increased issuance could be problematic; currently okay growth and market functioning help explain why the term premium has not moved more.

“Now in terms of can central banks control the long end, you know, it's really hard for them to because there's so many factors that go into it…”—

CPI And Fed Hike

Tim introduces the inflation-driven rate repricing and asks whether rising AI-related prices threaten progress toward bringing inflation under control.

October Pause Outlook

Kayla says September inflation is running hot, especially in transportation and commodities, but those pressures could still leave room for an October pause after a September hike.

AI And Core Inflation

Kayla highlights broad strength in core services and shelter, as well as record computer software and accessory inflation, and describes the Fed's challenge in assessing AI-driven growth.

Global Rate Repricing

The speakers discuss resilient growth and increasingly hawkish rate pricing abroad, while Kayla flags the risk that winter energy pressures could constrain European central banks.

Long-Term Yield Risks

Kayla says central banks have limited control over long-term yields because fiscal policy and term premiums matter, and sees scope for yields to rise if growth or market functioning worsens.

AI Investment And Rates

Kayla favors waiting for more clarity on inflation and growth, and questions whether higher rates can curb AI investment given major companies' secured revenues and strong cash flows.

Equity Diversification Limits

Kayla sees limited scope for sector diversification while rates remain high, with healthcare positioning and cash among the few alternatives as investors move between equities and cash.

Dollar Strength And Swiss Franc

Kayla expects near-term dollar strength to persist but warns that credibility concerns could weigh on it later, and points to the Swiss franc as a potential funding currency.