AI boom is translating into higher inflation, says Point 72's Dean Maki

Key Concepts

• Real Consumer Spending: Inflation-adjusted spending by households, currently showing a marked slowdown.
• Real Wage and Salary Income Growth: Income growth adjusted for inflation; it turned negative in Q1 and is projected to remain negative for the first half of the year.
• AI-Driven Economic Expansion: The phenomenon where investment in Artificial Intelligence (equipment and intellectual property) is the primary driver of current economic growth.
• Import Leakage: The concept that significant portions of AI-related equipment spending are directed toward imported goods, which reduces the net contribution to domestic Real GDP.
• PCE Price Index (Personal Consumption Expenditures): A measure of the prices that people living in the United States pay for goods and services, used to track inflation.

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1. The State of Consumer Spending

Dean Maki, Chief Economist at .72, highlights a clear deceleration in real consumer spending over the last two quarters.

• Trend Shift: The economy has moved from a growth rate of 2.5%–3.5% down to a 1.5%–2% range.
• Income Pressure: The slowdown is attributed to a decline in real wage and salary income growth, driven by a surge in inflation.
• Consumer Behavior: Households are increasingly forced to offset higher gas prices by taking on more debt, cutting discretionary spending, and, in some cases, sacrificing essential goods.

2. The Role of AI in the Macroeconomy

The discussion identifies AI investment as the primary "heavy lifter" preventing a sharper economic downturn.

• Sectoral Divergence: While most sectors are slowing, categories related to AI—specifically information processing equipment and intellectual property—remain robust.
• GDP Contribution: Data suggests that information processing equipment and intellectual property combined accounted for 1.5% of the 2% GDP growth. However, this is partially offset by the fact that much of this equipment is imported, which acts as a subtraction from domestic Real GDP.
• The "Papering Over" Effect: There is a debate regarding whether the wealth generated by AI and the spending of the wealthy are masking a broader deterioration in the rest of the economy.

3. Implications for Monetary Policy and Inflation

The panelists discuss the complexity this creates for the Federal Reserve.

• Inflationary Pressure: While AI investment supports growth, it also contributes to inflation. Dean Maki notes that prices for information processing equipment in the PCE price index rose 8.6% year-on-year.
• Policy Dilemma: The economy is experiencing a bifurcated reality where AI-related sectors are booming, while the broader consumer base is struggling. This leads to the suggestion that the economy might require different "interest rate" considerations for AI-driven sectors versus the rest of the economy.

4. Synthesis and Conclusion

The current economic landscape is characterized by a "slowdown, not a contraction." While the economy is not currently in a recession, the growth is heavily reliant on AI-related capital expenditure. The primary risks identified are the erosion of real income for the average consumer due to inflation and the potential for AI-related spending to mask underlying weaknesses in other sectors. The outlook for the second quarter suggests a continued deceleration in consumer spending, keeping the economic environment cautious despite the AI-driven expansion.