WisdomTree’s Kevin Flanigan and Jeff Wigger argue that AI may be inflationary before it becomes disinflationary. Their core point is that the current AI buildout is pulling forward costs in electricity, chips, water, and infrastructure, while higher energy prices are already feeding into transport and broader goods inflation. They also expect the Fed to sound more balanced and less outright dovish as inflation concerns reassert themselves.
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This episode centers on a simple but timely question: could the “I” in AI stand for inflation? Kevin Flanigan argues that, in the near term, yes — not because AI itself is inherently inflationary, but because the buildout behind it is expensive. He says the market is already seeing an “inflation trade,” with yields rising to levels not seen since early 2025, and he ties that move to stronger inflation readings and higher energy costs. The framing is that AI may eventually improve productivity and ease price pressures, but that outcome is a later-stage benefit; first comes the cost of building the system. The reasoning he gives is concrete: electricity demand, chip costs, infrastructure spending, and even water usage all rise as AI capacity scales. …
Near term, the actionable setup is an inflation-sensitive rates trade: if energy, power, and input-cost headlines stay hot, yields can keep drifting higher and dovish Fed expectations can get pushed back.
Over the next few months, the base case is that AI capex and energy demand continue to support the inflation narrative before productivity gains become visible. That view holds if inflation data stay sticky and the Fed turns more balanced; it fades if labor or operating efficiency improves quickly enough to offset the buildout.
Longer term, AI is framed as a regime where technological progress can first create cost pressure and only later become disinflationary through productivity. The structural implication is that investors should separate the buildout cycle from the eventual efficiency cycle rather than treating AI as automatically deflationary.
AI may be inflationary before it becomes disinflationary.
The hosts argue the buildout phase raises costs first, while productivity gains come later.
Higher energy prices are already filtering into broader inflation through transport and goods costs.
Flanigan says inflation is not just gasoline or crude; it is also trucking, rail, and getting goods from point A to point B.
The inflation trade has already pushed yields to levels not seen since early 2025.
He directly links the bond market move to rising inflation concerns.
Does the 'I' in AI stand for inflation or deflation? Give us the lay of the land on the inflation figures.
Kevin explains that the bond market has been seeing the inflation trade, with yield levels rising to readings not seen since early 2025. He notes that higher energy prices are eating into the broader macro landscape beyond just gas at the pump — things made with energy, like goods transported by trucking and rail, see cost increases passed on to consumers.
What are you seeing in terms of AI as it specifically relates to the inflation question?
Kevin responds that the common talk is AI will be a positive force keeping inflation in check due to productivity gains, but you have to get there first. The massive buildout of electricity, infrastructure, chips, and water is impacting many parts of the economy, so we may see 'AI inflation' first before 'AI deflation' in the years to come.
What do you anticipate will be the policy plank for Kevin Warsh and the Fed going forward?
Kevin says that Fed policymakers are moving toward a balanced approach to policy. While prior to the upcoming meeting there were expectations for a rate cut with the dot plot and Powell's press conference tilting toward ease, Kevin believes that will go by the boards and we'll see a more balanced Fed, noting that it's not just about Kevin Warsh — there are 11 other FOMC members speaking to inflation concerns.
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