Yardeni Says AI Buildout Is Adding To Inflation Pressure — Doubts Fed Will Need To Move Decisively Into Restrictive Territory

• Yardeni Research said it doubts that goods price deflation will return anytime soon.
• The firm said the AI investment boom is fueling spending on data centers, semiconductors, software and R&D.
• Stronger investment demand and scarcer savings are pushing the neutral real interest rate higher, it said.

Yardeni Research said Monday that the artificial intelligence (AI) buildout, along with elevated energy prices, tariffs and deglobalization, is putting upward pressure on goods prices, while stronger demand for capital and a smaller supply of national savings are pushing the neutral real interest rate higher.

In its Oct. 19 morning briefing, the firm argued that the U.S. economy has shifted from the sluggish growth, low inflation and exceptionally low interest rates that followed the global financial crisis to a period of stronger growth, persistent inflation and higher interest rates.

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Yardeni Doubts Goods Deflation Will Return

Yardeni said the AI buildout, elevated energy prices, tariffs, and deglobalization are putting upward pressure on goods prices and that it doubts goods-price deflation will return anytime soon.

Goods inflation averaged 0.2% annually between 2010 and 2019, compared with 1% since 2023. The firm noted that goods and services inflation both exceeded 3% in August this year.

Yardeni Sees A Higher Neutral Rate

According to the note, the AI investment boom is fueling spending on data centers, semiconductors, software and R&D. Overall nominal nonresidential fixed investment growth has averaged 8% annually since 2023, compared with 6% between 2010 and 2019.

The firm pointed to pressure on national savings from retiring Baby Boomers, tighter immigration policies and large federal deficits. Yardeni said scarcer saving and stronger investment demand are pushing the neutral real interest rate higher.

The 10-year Treasury yield has averaged 4.2% since 2023, while the 10-year TIPS real yield has averaged 1.9%, up from 0.4%. Yardeni noted that real Treasury yields are not direct measures of the neutral real rate, but said their rise is consistent with a higher equilibrium real rate.

The iShares 20+ Year Treasury Bond ETF (TLT) and the iShares 7-10 Year Treasury Bond ETF (IEF) traded marginally higher at the time of writing. On Stocktwits, retail investor sentiment toward TLT remained bullish, while sentiment around IEF flipped to ‘neutral’ territory.

The Fed May Need Another 50 Basis Points

Yardeni estimates the neutral federal funds rate at 4.25% to 4.50%. That is above the Federal Reserve’s current target range of 3.75% to 4%, which followed a 25-basis-point hike in September 2026.

The firm argued that the Fed placed too much weight on downside risks to employment when it cut interest rates by 75 basis points between September and December 2025, pushing rates below neutral.

Another 50 basis points of tightening would bring monetary policy back toward Yardeni’s estimated neutral range. However, the firm doubts the Fed will need to move decisively into restrictive territory, saying productivity growth under its Roaring 2020s scenario should continue to restrain unit labor costs.

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