Citi analysts say that AI-related price surges are distorting inflation, but this may create a dovish opening for the Fed.
The minutes of the Fed's April meeting show that some policymakers noted the boost to core inflation from software industry price increases. However, they highlighted that such increases may not be good predictors of future overall inflation.
Citi analysts point out a big difference between the core CPI and the Fed's preferred gauge, core PCE. In April, core CPI rose 2.8% YoY, while core PCE increased 3.2% YoY. The Fed's target is 2% inflation.
According to analysts, the divergence largely comes down to surging memory prices. The 'Computer Software and Accessories' sub-index, which has mostly declined over the last 25 years, is now up 13.9% YoY.
The tech sector faces a supply crunch for memory chips as AI demand surges since late 2022. This poses a hurdle for chipmakers and mega tech firms spending heavily on AI.
The AI trade has driven Wall Street to record levels this year. The Philadelphia Semiconductor Index posted an 18-day win streak, its longest ever.
Citi analysts say AI-related price increases provide a dovish opening for Fed Chair Kevin Warsh. Warsh takes charge at a complicated time as Trump calls for rate cuts, but rising oil prices due to Middle East conflict make that unlikely.
