FED REPORT CITES "STEPPED-UP" INFLATION FROM TARIFFS, IRAN WAR AND AI BUILDOUT

The Federal Reserve's semiannual monetary policy report to Congress said U.S. inflation "stepped up further this spring" as tariffs, war-related energy costs and rapid artificial-intelligence investment added to price pressures, according to Reuters. The report said inflation has risen and remains elevated relative to the Federal Open Market Committee's 2% longer-run objective. As of May, the personal consumption expenditures price index was running at about double that target. The document is the first semiannual report issued under new Fed Chair Kevin Warsh.

The report's inflation discussion focused on several sources of pressure rather than one single cause. Reuters reported that the Fed cited the evolving effect of tariffs, higher energy costs tied to the U.S.-Israeli war with Iran, and the booming AI buildout as contributors to the spring pickup in inflation. The report does not treat inflation as resolved, and it does not present the recent rise as only a temporary statistical issue. It says price growth remains too high compared with the central bank's stated objective.

The AI buildout is a notable part of the report because it has become both a source of economic growth and a potential source of inflation pressure. The Fed said economic growth remained moderate through the first months of 2026, with gross domestic product expanding at a 2.1% annual pace. Reuters reported that the report described AI investment as one of the forces supporting growth. At the same time, heavy spending on data centres, specialised chips, electrical equipment and power supply can raise demand for scarce inputs and contribute to price pressure before productivity gains arrive.

Warsh has previously pointed to artificial intelligence as a possible long-term source of lower inflation through productivity gains, but has more recently acknowledged that the timing of those supply-side gains is uncertain while AI-related demand for electricity, chips and other buildout inputs remains immediate. That distinction helps explain why AI can appear on both sides of the Fed's outlook. In the long run, the technology could increase productivity and lower costs. In the near term, the construction and equipment cycle required to build AI capacity can add demand to parts of the economy that are already constrained.

The report described economic growth as "moderate" in the first months of 2026. Reuters reported that GDP grew at a 2.1% annual pace, supported by AI investment but held back by a stagnant housing market and only modest gains in household consumption. That combination suggests an economy that is still expanding but unevenly. Strong capital spending in one sector does not automatically translate into broad household strength, especially if housing remains weak and consumers are facing elevated prices.

The labour market has stabilised, with demand and supply roughly in balance, and the report said the June unemployment rate of 4.2% remained "low." That framing matters for monetary policy because the Fed is responsible for both maximum employment and stable prices. A low unemployment rate gives policymakers less reason to ease policy if inflation is still above target. At the same time, a balanced labour market may reduce fears that the economy is overheating through wages alone. The report's balance is that the job market is no longer the main warning light, while inflation remains the central concern.

The Fed has held interest rates steady since December, according to Reuters. The report itself is not a rate decision, but it frames the economic backdrop Warsh will bring to Congress. Investors have increasingly anticipated possible rate increases later this year, especially as inflation concerns grew after the start of the U.S.-Israeli war with Iran in late February.

The next developments to watch are Warsh's testimony before House and Senate committees, the next PCE inflation data, and whether the Fed's July meeting statement changes its assessment of inflation risks. For now, the public record is that the Fed's semiannual report says inflation stepped up further this spring, remains above the 2% objective, and is being pushed by tariffs, energy shocks and AI-related investment demand.

Fact-check date: 12 July 2026
Article type: News
Sources: Reuters; KSL; Federal Reserve semiannual monetary policy report to Congress