Most economic indicators show that the explosion in artificial intelligence infrastructure spending is having a positive effect on the U.S economy.
U.S. gross domestic product rose at an annual rate of 2% between January and March, according to the Bureau of Economic Analysis. While that was below economists’ expectations, it was a significant improvement from the 0.5% growth recorded in the fourth quarter of 2025.
“The contribution of artificial intelligence to GDP growth in the first three quarters of 2025 was comparable to the height of the dot-com bubble in 2000. AI accounted for 39% of GDP growth in 2025 (through the third quarter) versus 28% in 2000,” Hannah Rubinton, an economist with the St. Louis Federal Reserve, recently told Marketplace.
Still, “while AI investments are still high, their quarterly growth rates have tapered off,” she concluded.
Even if it is declining, AI spending is still providing a positive boost for the economy. However, analysts at Wells Fargo also see a downside to the AI-driven economy: inflation.
The AI-investment boom is helping drive inflation
Much of the U.S. economy’s resilience of the past year is attributed to a capital expenditure investment cycle that analysts at Wells Fargo call “extraordinary.”
But AI spending is also having a less visible effect on inflation, which has already been accelerated due to the Iran War, according to the analysts.
Wells Fargo points out that upstream, wholesale inflation, or the prices businesses pay, is up 6.5% year over year in May, according to the Producer Price Index. And even when you strip out volatile food and energy prices, PPI rose by 4.9% in May after rising just 2.7% in June 2025.
“While some of this price pressure has stemmed from U.S. tariff increases over the past year, much of the increase has been tied to brisk spending on AI-related and other technology and automation to improve productivity and drive profit growth,” Wells Fargo analyst Jennifer Timmerman said in a report viewed by TheStreet.
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According to the firm, there are three specific areas where AI spending is causing higher prices.
- Global shortages of semiconductors and industrial inputs
- Elevated energy costs tied to the explosion of AI data-center capacity
- “Panic ordering” by companies in a race to secure resources to build data centers and expand manufacturing capacity.
“We expect PPI inflation to remain uncomfortably high for the foreseeable future. We believe the scale of AI-related order backlogs for capital goods is substantial enough that elevated investment spending should persist through our forecast horizon of 2027,” Timmerman said.
There are still areas of the economy where AI-induced inflation hasn’t impacted yet.
Consumer inflation is better insulated from this inflation as “limited passthrough of upstream pressure on technology costs” has helped limit the impact AI spending has had on Consumer Price Index inflation.
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How can investors weather AI inflation storm?
Wells Fargo says that some inflation is not necessarily a bad thing for the stock market, as some equity sectors and subsectors can actually benefit from higher prices.
Inflation in materials, industrial and specialty chemical sectors is a good thing for investors in those sectors because those companies are well-positioned to pass along higher input costs to customers.
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So what advice does Wells Fargo have for investors looking to navigate this environment? Turn lemons into lemonade.
“Overall, we prefer to keep exposure to longer-term themes – with AI and technology spending being the dominant trend – but adjust portfolios when potential opportunities appear to add value,” Timmerman wrote.
“We continue to favor equities over fixed income and, within equities, the Information Technology sector, as well as Materials, Utilities, and Industrials, which build out AI capabilities but appear less expensive to us. Finally, we prefer that investors consider some allocation to commodities, which can serve as a useful inflation hedge and more general portfolio diversifier.”
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