Will AI boost disinflation?

According to the University of Michigan's June Survey of Consumers, U.S. consumers' one-year inflation expectations declined from 4.8% to 4.6%, while five-year inflation expectations fell from 3.9% to 3.3%.

So, the picture seems to be improving, but inflation expectations remain well above the levels that would make the Fed comfortable with lowering interest rates.

Now, if the Houthis' threats to target Saudi airports, Saudi Aramco refineries, and other critical infrastructure — as well as potentially disrupt shipping through the Bab el-Mandeb Strait — prove to be more than just rhetoric, the inflation outlook could deteriorate once again.

For now, however, markets don't seem to see that happening: oil prices rose just 1.3% on Tuesday, while S&P 500 futures slipped only 0.2%, suggesting investors believe the worst phase of the conflict is behind us and that none of the key players has an interest in triggering another major disruption to global energy supplies.

But even if the geopolitical backdrop remains stable, bringing inflation back to 2% will take quite some time. Can AI help accelerate disinflation?

Kevin Warsh, a new Fed Chair, doesn't rule it out. Earlier, he argued that AI could trigger an unprecedented surge in productivity, allowing companies to produce more goods and services at lower cost, ultimately easing price pressures.

There's certainly logic to that view. The thing is that AI has already proven to be inflationary in the short run by boosting aggregate demand. Massive investments in data centers, semiconductor manufacturing, and AI infrastructure are creating strong demand for materials, electricity, and skilled labor, putting upward pressure on prices.

Even if AI delivers meaningful productivity gains over the long term, most economists expect its impact on inflation to be fairly modest over the next two years — likely less than 0.2 percentage points.

And there's another important consideration. Even if energy markets stabilize and AI significantly boosts productivity, import tariffs aren't going anywhere, offsetting at least part of the potential disinflationary benefits AI might eventually deliver.

In summary, don't expect AI to accelerate the pace of Fed rate cuts. For now, all eyes remain on gasoline prices, the pace of AI-related investment, semiconductor supply constraints, and the trajectory of trade wars, with most problems still far from resolved.