AI spending boom may keep US inflation and interest rates elevated: Jefferies Report

The ongoing surge in artificial intelligence (AI)-related spending could keep inflation elevated in the United States and force interest rates to remain higher for longer, according to Jefferies' latest Greed & Fear report.

The ongoing surge in artificial intelligence (AI)-related spending could keep inflation elevated in the United States and force interest rates to remain higher for longer, according to Jefferies' latest Greed & Fear report. The report said strong spending by major technology companies on AI infrastructure is supporting economic growth but is also adding to inflationary pressures, complicating the outlook for monetary policy.

"One consequence of the stickiness of inflation in America, with headline CPI inflation running at its highest level in three years, is that nominal growth has been running at 5.9% YoY in 1Q26, driven primarily by the still accelerating AI capex arms race," the report said. According to Jefferies, financial markets are increasingly factoring in the possibility of further rate hikes as inflation remains persistent.

"The same logic, of course, applies to the US where new Fed chairman Kevin Warsh has presided over a more hawkish message than GREED & fear would have expected in his first FOMC meeting this week," the report noted. The report added that investors are now expecting tighter monetary policy over the coming months.

"As a result, money markets are now expecting 36bp of rate hikes by the end of 2026 while importantly, the two-year Treasury yield had its biggest one-day move in 14 months rising by 13bp to 4.18% yesterday," it said. Jefferies also pointed to rising inflation expectations among businesses, suggesting that price pressures remain broad-based across the economy.

"While they remain well anchored in terms of the five-year forward measure by the Fed, it is interesting to note that surveys of business price expectations, be they prices paid or prices received, are rising," the report said. Despite concerns over inflation and higher bond yields, the report argued that equity investors remain focused on strong earnings growth driven by AI investments.

"So long as the AI capex focus is ongoing, and the returns are not questioned, the American stock market will continue to focus on the positive earnings revisions," Jefferies said. The report highlighted that earnings expectations for US companies have improved sharply over the past several months.

"The LSEG I/B/E/S consensus data as of 12 June now shows that S&P500 2Q26 earnings are expected to rise by 22.8% YoY, up from 12.8% growth expected last October," it said. However, Jefferies cautioned that the market's dependence on a narrow group of AI-linked technology stocks is becoming increasingly evident, even as investors continue to reward companies benefiting from the AI investment cycle. (ANI)