AI's Infrastructure Boom Is Now an Inflation Risk for Stocks and Bonds

Why AI's Buildout Is Showing Up in the CPI

The long-term story on artificial intelligence has been that it should help cool inflation: higher productivity, lower production costs and less wage-driven demand. But the near-term reality looks different. Building AI infrastructure is expensive, and those costs are beginning to show up in consumer prices. In the July CPI report, computer prices rose 3.5% in a single month, while software prices climbed about 40% over the past year.

Bank of America made the case in a client note that AI is now inflationary on several fronts. Data centers are competing for power and pushing up energy costs, and businesses are passing along the price of AI installation to customers. Stephen Juneau, an economist at the bank, said AI is not only raising input costs for electronics but also driving a positive wealth effect that supports consumer demand. The disinflationary payoff that Fed Chair Warsh has pointed to, Juneau said, appears to be arriving later than expected.

That matters for stocks through two interest-rate channels. On the short end, higher inflation raises pressure on the Federal Reserve to hike its overnight lending rate, which can slow earnings growth. Tom Essaye of Sevens Report Research said the AI buildout is unlikely to cause a sustained bout of inflation, but it strengthens the case for a one-and-done rate hike at the Fed's September meeting. On the long end, inflation pushes up bond yields because investors demand higher returns to protect against eroding purchasing power. The 10-year Treasury yield now sits at 4.64%, up from 4.15% at the start of the year, and MRB Partners expects long-term yields to rise further.

Bank of America's Rate Warning and the Yield Threat to Equities

Bank of America's Two-Channel Inflation Warning

The bank's argument is that AI is creating price pressure through both supply and demand. On the supply side, electronics and software costs are rising as companies buy the components and services needed for AI. On the demand side, the wealth generated by AI-related assets is helping households keep spending, which can make inflation harder to dislodge. That combination complicates the earlier narrative that AI would quickly be disinflationary.

Why the Short End Reinforces a September Hike

Tom Essaye's view is that AI infrastructure spending is not enough to produce a long-lasting rise in inflation, but it is enough to give the Federal Reserve a reason to act. A rate hike would work as a brake on economic activity and could slow earnings growth, which is the foundation of stock prices. The September meeting therefore becomes the near-term policy event that equity investors need to price against.

The Long End: MRB Partners Ties Higher Yields to Equity Corrections

Higher inflation expectations tend to push long-term bond yields higher, and that is what has happened with the 10-year Treasury yield moving from 4.15% to 4.64% this year. MRB Partners sees further upside in yields and argues that this will eventually become a problem for US equities. Philip Colmar, a partner of global strategy at MRB, noted that every time 10-year yields have broken out meaningfully to the upside since 2020, equities have experienced a sharp correction.

What the Inflation Signal Means for AI-Exposed Portfolios

The main market signal to track is the move in the 10-year Treasury yield, because it connects inflation expectations to equity valuations.

• Watch whether the 10-year yield extends above 4.64% after starting the year at 4.15%; MRB Partners says every meaningful upside breakout since 2020 has been followed by a sharp equity correction.
• If you hold AI-related technology shares, monitor the next CPI report for computer and software prices after the July report showed a 3.5% monthly jump in computer prices and roughly 40% annual increase in software prices.
• Treat the Fed's September meeting as the near-term policy trigger: Tom Essaye of Sevens Report Research says the AI buildout strengthens the case for a one-and-done rate hike, which could slow earnings growth.
• For bond-sensitive equity positioning, note that MRB Partners is explicitly bearish on US Treasurys and expects long-term yields to rise further, a scenario it says will eventually become problematic for US equities.