Fed’s Daily Says Continued Chip Shortages Could Help Fuel Inflation For Longer

Mary Daly, president of the Federal Reserve Bank of San Francisco, said AI-related shortages could help fuel inflation for longer, potentially requiring further tightening from the central bank.

Speaking to Axios, Daly said constraints could spread from the industry and into the wider economy for longer than the 1-3 year period the Fed would expect for regular shocks. Her conversations with companies from Silicon Valley that delve in other fields but also experience the shortages are helping inform her assessment.

"It doesn't seem like the demand for AI is going down. If anything, it seems like it's going up," Daly said. "This is probably further out before we get relief," she added.

Expectations of further tightening by the Fed decreased last week after the September jobs report was much weaker than expected. They had also fallen on Wednesday after the central bank's preferred inflation gauge was much lower than expected.

According to the latest data from the Commerce Department, the personal consumption expenditures price index climbed a seasonally adjusted 0.3% for the month. The 12-month gain stood at 3.4%, below the 3.7% expected by economists.

However, the core index showed a 0.2% increase, below the 0.3% expected by economists. The annual figure stood at 3%, below the 3.3% expected by analysts.

Regardless, Minneapolis Fed President Neel Kashkari said inflation concerns remain. Speaking at a Council on Foreign Relations event in New York lats week, Kashkari said that "there are many different measures of inflation, but it's running at around a 3% rate."

"It's been elevated now for more than five years. I didn't think the inflation data today really changed that story for me very much." He went on to note that other data also released on Wednesday, including an updated GDP report and private payrolls, showed that the U.S. economy remains "resilient."

Data from the Commerce Department's Bureau of Economic Analysis showed that the economy grew 2.2% in the second quarter of the year, slightly less than in the first one (when it grew 2.5%) but above its previous estimate of 1.5%.

"Real GDP was revised up 0.7 percentage point from the second estimate, primarily reflecting upward revisions to investment, consumer spending, and government spending," the report said.

Consumer spending, which accounts for about 70% of the U.S. economic activity, climbed 3.8%, up from 0.7% in the first quarter.