AI Boom Stokes Inflation With Memory Chips at ‘Insane’ Prices

j30jj985x7p9fcjo8(duz{0}_media_dl_1.png Bloomberg Economics

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(Bloomberg) — When Chris Barber, who’s been in the computer business for a quarter-century, says he’s never seen anything like the AI boom, he’s not talking about its potential to transform the future. He means what it’s doing to hardware prices right now.

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Barber runs “Cheaper Than a Geek,” a Baltimore-based outfit that helps small companies with IT. Memory upgrades are a popular service, but nowadays he’s advising people that it’s barely worth the cost. RAM chips that sold for $100 six months ago are an “insane” $300 now, so customers may be better off just buying a new computer. “Parts themselves are just completely out of control,” Barber says. “This is the worst increase I’ve ever seen.”

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Behind it lies the rush to build data centers, which power artificial intelligence and need vast quantities of memory chips. That surge in demand is what’s pushing prices up for industry specialists like Barber who buy RAM chips raw. But the ultimate impact is much broader, since memory is embedded in all kinds of consumer staples, from phones and computers to cars. 

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The upshot: AI, driver of growth in America’s economy and creator of record wealth in its stock markets, has also become part of the country’s latest inflation problem.

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Headline inflation climbed back above 4% last month for the first time since the spring of 2023. While the principal cause is an oil spike, triggered by the US war in Iran, AI is chipping in too.

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Software and computer accessories, which usually trend cheaper as technology improves, were up a record 14.5% in May from a year earlier. The memory squeeze will add 0.4 percentage point to headline inflation before it eases, Bloomberg Economics calculates. There are other knock-on effects too, like higher electricity prices due to demand from data centers.

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‘Certainly Inflationary’

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All of this adds financial strain to households still scarred by the post-pandemic inflation wave. It creates headaches for President Donald Trump and his Republican party, ahead of midterm elections — and for the Federal Reserve under its new chief Kevin Warsh, who’s argued that AI will eventually make companies and workers more productive, easing price pressures in the economy.

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For now it’s having the opposite effect, says Stephanie Roth, chief economist at Wolfe Research. “The AI boom is stoking overall inflation pressure in meaningful ways,” she says. “The disinflationary productivity boom is still a ways out.”

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Fed Governor Lisa Cook and St. Louis Fed chief Alberto Musalem are among policymakers who’ve recently highlighted various ways the AI boom is pushing prices up, whether via chips or electricity. 

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It’s among the factors that will likely prevent Warsh from cutting interest rates as quickly as he’d suggested should be possible, according to Torsten Slok, chief economist at Apollo Global Management Inc.

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“Initially the AI boom will certainly be inflationary,” Slok told Bloomberg Television’s Surveillance. The risk is “very clear when you look at semiconductor prices, when you look at energy prices, when you look at labor.”