Fed Chair Kevin Warsh Has a New Inflation Nightmare: AI Is Skyrocketing Prices

PCE inflation ran at 4% in March and core PCE remained at 3% while the federal funds rate stayed at 4% and the 10-year Treasury yield rose to about 5%. Consumer sentiment weakened, with the University of Michigan index at 53.3 in March. For roughly four decades, falling semiconductor prices helped keep U.S. inflation contained, but that tailwind has flipped. Producer prices for semiconductor and electronic components have surged, reflecting higher pricing for accelerated compute. NVIDIA supply-chain costs rose sharply between generations, and data center revenue and supply commitments expanded rapidly, indicating strong demand and pricing power.

"Headline Personal Consumption Expenditures (PCE) inflation ran at 4% in March, with core PCE stuck at 3%. The federal funds rate has held at 4% since January, while the 10-year Treasury yield ripped to 5% in May, near its 12-month high. Meanwhile, consumer sentiment is flashing red: the University of Michigan index printed 53.3 in March, recessionary-adjacent territory."

"For four decades, the Producer Price Index (PPI) for Semiconductor and Other Electronic Component Manufacturing, tracked by FRED, the Federal Reserve Bank of St. Louis's economic data portal, trended down. Chips got cheaper, and that quiet deflation kept a lid on the broader basket of goods. That FRED series is now skyrocketing. The multi-decade tailwind has flipped into a headwind."

"The bill of materials for NVIDIA's NVL72 rack jumped from $373,939 for the GB300 generation to $2,001,600 for the VR200 generation, a 435% increase. That's a producer-price signal of the first order. The demand behind that pricing power showed up in NVIDIA's Q1 FY2027 report, filed May 20. Data center revenue hit $75.25 billion, up 92% year over year, while total supply-related commitments swelled to $119 billion."

"Hyperscalers and chipmakers have decided the value of accelerated compute justifies paying dramatically more per unit, and suppliers are pricing accordingly. The clearest evidence sits inside NVIDIA's supply chain. Per Morgan Stanley Research, the bill of materials for NVIDIA's NVL72 rack jumped from $373,939 for the GB300 generation to $2,001,600 for the VR200 generation, a 435% increase."

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