Fed’s July Monetary Policy Report Flags Accelerating Inflation Amid AI Boom, Tariffs and Middle-East Energy Shock

On July 10, the Federal Reserve released its semi-annual Monetary Policy Report to Congress, the first compiled under Chair Kevin Warsh. The report states that “inflation has risen this year and remains elevated relative to the Federal Open Market Committee’s longer-run objective of 2 percent.” It attributes the spring-time step-up to three primary forces: higher import prices from tariffs retained from the previous administration, a surge in energy costs linked to the Middle-East conflict, and “the booming buildout of artificial intelligence (AI) technology” that is pushing up demand for semiconductors, computers and data-centre equipment.

Fed Report to Congress Flags AI Boom as Factor in Accelerating Inflation; Chair Warsh to Testify Next Week — BigGo Finance

The report follows a delayed spring hearing that was postponed amid a dispute between former Fed Chair Jerome Powell and President Donald Trump. Warsh, who assumed the chair in late May, has signaled a willingness to consider both rate hikes and cuts, but the current data have shifted the Fed away from an easing bias. The labor market is described as “stable, with demand and supply broadly in balance,” while a “marked slowdown in immigration” and an aging population are curbing labor-force growth.

The Globe and Mail (Toronto)

• Personal Consumption Expenditures (PCE) price index: 4.1 % year-over-year in May, roughly double the 2 % target.

Fed report to Congress sees 'stepped up' inflation in the spring

• Core PCE: 3.4 % in May, up from 2.8 % a year earlier.

Fed report to Congress sees 'stepped up' inflation in the spring

• Energy prices: up 24 % from a year earlier; “prices for computers, software and electronics” rose sharply on AI-driven demand.

Fed Report to Congress Flags AI Boom as Factor in Accelerating Inflation; Chair Warsh to Testify Next Week — BigGo Finance

• GDP growth: 2.1 % annualized in the first quarter; private domestic final purchases grew 1.7 %.

Fed report to Congress sees 'stepped up' inflation in the spring

• Unemployment: 4.2 % in June, unchanged since the previous summer; job openings flat, layoffs subdued.

Reuters

• Money supply (M2): annual growth returned to “levels commonly seen in the 2010s,” with pandemic-era “real money balances” largely unwound.

Reuters

The report reiterates the Fed’s commitment: “Price stability is essential for a sound and stable economy and supports the well-being of all Americans.” It notes that “the Committee is prepared to act forcefully to ensure that longer-term inflation expectations remain well anchored.” Warsh highlighted AI’s dual role, saying it “could structurally suppress inflation in the long run by enhancing productivity,” while acknowledging that current AI-related demand is a near-term price-push factor. The Fed cautioned that “these prescriptions should be interpreted with care,” warning against mechanical reliance on numerical policy rules.

Bloomberg

Some market participants question the necessity of further tightening. Wei-Yao Hu, product manager at Allianz Global Investors, argued that the “likelihood of the Fed moving to raise rates this year is low,” noting that both tariff-related and oil-related price pressures have receded from their peaks. Within the June FOMC meeting, participants were split between expectations of additional hikes and forecasts of a steady or falling policy rate.

Fed's Monetary Policy Report Warns Inflation "Accelerated Further This Spring" — Tariffs, Middle East Risks Push 2% Target Further Away — BigGo Finance

While headline PCE inflation is rising, the Dallas Fed’s trimmed-mean measure “eased to 2.4 %,” suggesting mixed signals across inflation gauges. The report also flags uncertainty about the timing of AI-driven productivity gains, leaving the net impact on price pressures ambiguous.

Fed's Monetary Policy Report Warns Inflation "Accelerated Further This Spring" — Tariffs, Middle East Risks Push 2% Target Further Away — BigGo Finance

• “Inflation has risen this year and remains elevated relative to the Federal Open Market Committee's longer-run objective of 2%,” — Federal Reserve report

Reuters

• “Price stability is essential for a sound and stable economy and supports the well-being of all Americans,” — Federal Reserve report

Bloomberg

• “We have been an independent central bank for a very long time, and we remain an independent central bank at this moment. That has not changed.” — Kevin Warsh, Chair, Federal Reserve

Fed Report to Congress Flags AI Boom as Factor in Accelerating Inflation; Chair Warsh to Testify Next Week — BigGo Finance

• “AI is beginning to show up on the demand side of the economy right now. I am confident it will eventually show up on the supply side as well.” — Kevin Warsh, Chair, Federal Reserve

Fed Report to Congress Flags AI Boom as Factor in Accelerating Inflation; Chair Warsh to Testify Next Week — BigGo Finance

• “occurs when the government prints too much money and spends too much,” — Kevin Warsh, Senate confirmation hearing, April

Fed's Monetary Policy Report Warns Inflation "Accelerated Further This Spring" — Tariffs, Middle East Risks Push 2% Target Further Away — BigGo Finance

Chair Warsh will testify before the House Financial Services Committee on Tuesday, July 14, and before the Senate Banking Committee on Wednesday, July 15. The hearings will coincide with the release of the June Consumer Price Index, projected at a 3.8 % year-over-year increase, providing further clues on the Fed’s near-term policy trajectory.

Fed Report to Congress Flags AI Boom as Factor in Accelerating Inflation; Chair Warsh to Testify Next Week — BigGo Finance