Cook from the Fed: Inflation Risks Are Growing... Ready to Act If Not Controlled

[Mexico City = Shim Young-jae, Correspondent] Lisa Cook, a member of the U.S. Federal Reserve (Fed), stated that she sees inflation risks as greater than employment risks. While the U.S. economy and labor market remain stronger than expected, investments in artificial intelligence (AI) infrastructure and conflicts in the Middle East are causing new price shocks.

The Fed has signaled that it may take additional monetary policy actions if inflation does not slow down soon. Lisa Cook warned that investments in AI data centers and rising energy prices are likely to prolong high inflation rather than being mere one-off shocks.

In a speech at the Exchequer Club in Washington, D.C. on the 15th (local time), Cook stated, "Persistently high inflation imposes an unacceptable burden on U.S. households," adding, "Currently, I am more concerned about the risks arising from high prices."

Cook noted that the U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) released this week were lower than market expectations, but the price index targeted by the Fed is estimated to have risen by 3.7% over the past 12 months until June, exceeding the Fed's inflation target of 2% by 1.7 percentage points.

She emphasized that the U.S. inflation rate has not reached the 2% target for over five years. This suggests that even if short-term indicators come in weaker than expected, it is too early to conclude that price stability has been achieved.

Employment Risks Decrease, Inflation Risks Increase

Cook likened the Fed's dual mandate of price stability and maximum employment to a seesaw. Last year, employment and inflation risks were relatively balanced, with employment risks weighing somewhat heavier, but now the seesaw has tilted towards inflation.

The U.S. unemployment rate in June was 4.2%, generally consistent with trends over the past year. The number of new unemployment claims has remained low, and non-farm employment has increased moderately. In recent months, job openings have also risen.

The so-called "low-hiring, low-firing" environment, where both new hires and layoffs are minimal, is putting pressure on new entrants to the labor market, but Cook believes this does not signal a sharp downturn in the overall labor market.

Regarding the impact of AI on jobs, she assessed that the most pessimistic forecasts have not yet materialized. While she views the employment shock from AI as a significant risk, she stated that there is not much evidence to suggest that this risk has increased compared to a year ago.

Economic growth has also been stronger than expected. The U.S. GDP growth rate for 2025 is projected to be 2.0%. Members of the Federal Open Market Committee (FOMC) forecast a growth rate of 2.2% for 2026. Both figures are about 0.5 percentage points higher than last year's projections.

Labor productivity has increased by an average of about 2.5% over the past two years. Cook explained that the construction of data centers has also stimulated economic growth and investment demand. This suggests that the need to quickly lower interest rates for economic stimulus has diminished, given that the economy and employment are stronger than expected.

AI and Middle East Conflicts as New Price Shocks

Cook pointed out that the current inflation in the U.S. cannot be explained solely by rising energy prices.

Core commodity prices are showing a steep increase of about 5% year-on-year for 2026. Considering that core commodity prices had been on a long-term downward trend before COVID-19, this is an unusual movement.

Cook explained that the U.S. economy has experienced two unexpected price shocks this year. One is the conflict in the Middle East, which has driven up energy prices and could have a cascading effect on the prices of other goods such as food.

The other shock is capital expenditure for building AI infrastructure. With rapid increases in investments in data centers and AI facilities, prices for semiconductors, advanced equipment, software, and public services have risen significantly.

According to Cook, companies have announced data center investment plans exceeding $1.5 trillion. The actual amount executed so far is only a portion of the total plans. Investments in AI-related capital expenditures, including robots, could also see significant increases in the future.

If AI companies and technology investments do not meet expectations, there is a possibility that capital inflows could weaken. However, so far, there are no signs of a slowdown in AI infrastructure investment, and the Fed is primarily monitoring the impact of increased demand on prices.

"Ready to Act If No Disinflation Occurs"

The Fed held the benchmark interest rate steady at last month's FOMC meeting. Cook, along with other members, supported the freeze.

She explained that tariffs and conflicts in the Middle East have raised prices, but theoretically, both factors could be temporary shocks that only elevate price levels for a short time. Therefore, she believes it is prudent to observe how prices develop in the future.

However, she assessed that inflation risks still lean significantly to the upside. Continued investments in AI infrastructure and rising costs due to tariffs and Middle East conflicts could be reflected in companies' pricing and wage decisions for an extended period.

In a situation where high prices have persisted for five years, companies and workers may base their decisions on the inflation rates they have experienced recently rather than the causes of price shocks. There are concerns that repeated temporary shocks could seep into expectations of inflation and pricing structures.

The generally stable medium- to long-term expectations of inflation are a positive factor. Wage growth rates are also slowing, and recent indicators are approaching levels consistent with the Fed's 2% inflation target.

However, Cook emphasized that the Fed should not be complacent just because inflation expectations have stabilized. She stated, "If signs of inflation moderation do not appear soon, we are prepared to act," adding, "Our commitment to achieving the 2% inflation target remains unwavering."

Cook concluded that while the U.S. economy remains robust, the Fed's policy risks have shifted towards price stability over employment in the past year. She stated that she would review new economic indicators, forecasts, and the balance of risks at the upcoming FOMC meeting in two weeks to determine the appropriate policy path.

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