AI boom will keep US inflation sticky
A firmer economy and stickier inflation will keep the Federal Reserve on a prolonged hold
We forecast GDP growth of 2.2% this year, up 0.3ppts from our April baseline, but still down from our pre-war projection of 2.8%. The rebound in equity markets will partly offset the hit to consumer spending from rising gasoline prices, and the rapid AI buildout and turn in the inventory cycle are supporting activity.
Short-term forecast: Looser fiscal policy and an AI-driven boom in business investment are supporting economic growth, but higher energy prices will drag on consumer spending. We expect core inflation to remain close to 3% through the end of the year, before decelerating gently in 2027.
What to watch out for: The Iran war still presents downside risks to the near-term outlook via higher energy prices, the impact on the stock market, and supply chain risks. AI has yet to have a significant impact on the labor market, but there are signs of more hiring and firing in sectors at the leading edge of AI adoption.
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