BlackRock says inflation could be an unwelcome side effect of the AI-driven productivity boom

• Capital spending on AI data centers could bring back inflation before boosting economy, BlackRock said.
• The risk is under-appreciated by markets and central banks, it said.
• In the short term, AI winners will drive returns up for six to 12 months.

To unlock the full potential of artificial intelligence, the US may have to confront an inflationary flare-up, BlackRock said in its latest weekly commentary.

"Capital spending on AI data centers has boomed since last year's ChatGPT moment," analysts led by Jean Boivin wrote on Monday. "This capex boom and draw on resources could create bottlenecks, meaning AI will likely be inflationary in the near term before unlocking any of the long-run benefits that could ease inflationary pressures."

Since late 2022, Wall Street has gone all-in on AI, betting that the emerging technology will turbocharge productivity and offer huge economic gains. According to Wedbush Securities, an estimated $1 trillion will be spent by companies on AI over the next decade.

Some of that investment is to create the infrastructure that AI runs on, from data centers to the utility grids that power them. To BlackRock's point, this is already starting to strain supply in the broader market.

For instance, with AI expected to help drive electricity usage up 160% by 2030, that's put a massive demand burden on copper. In fact, the supply-demand imbalance was so great that the commodity briefly rocketed to over $11,000 a ton in late May.

Still, the risk of AI-driven inflation is not yet appreciated by markets or central banks, BlackRock.

Instead, most of Wall Street is priming itself for more upside from the tech frenzy, and the firm expects a concentrated group of AI winners to send returns higher for another six to 12 months.

"The AI rally is supported by earnings and has more room to run, in our view. We don't see an AI bubble, and the profitability of mega-cap tech companies stands in contrast to the unprofitable companies driving the dot-com bubble," analysts wrote.

As to inflation, BlackRock expects global monetary policies to remain tighter for longer, not only in the near term. Worldwide, aging populations, changing supply chains, and the low-carbon transition are restraining production, it said.