US Stock Market: Inflation gathers pace as tariffs, energy costs and AI investment lift price pressures, says Fed

U.S. inflation accelerated further during the spring as higher tariffs, rising energy costs linked to geopolitical tensions and heavy investment in artificial intelligence added to price pressures, according to the Federal Reserve's latest monetary policy report to Congress, Reuters reported.

The report said inflation remains above the U.S. central bank's 2% target, with the Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation gauge, running at roughly twice that level as of May. The findings underscore the central bank's continued struggle to bring inflation back to target despite holding interest rates steady since December.

At the same time, the Fed said the labour market has largely stabilised, with labour demand and supply broadly in balance. The unemployment rate stood at 4.2% in June, while job openings have remained largely unchanged and layoffs have stayed subdued.


However, the report noted that labour force growth has slowed sharply due to weaker immigration and an ageing population, both of which have reduced the number of people available to work. Despite the slower expansion in the workforce, the Fed said the economy's productive capacity continues to grow at a healthy pace because of strong gains in labour productivity.

According to Reuters, the central bank described overall U.S. economic growth as moderate during the first few months of 2026. Gross domestic product expanded at an annualised pace of 2.1%, supported by robust investment in artificial intelligence infrastructure. Growth, however, was restrained by a stagnant housing market and only modest increases in household spending.

The report marks the first semi-annual monetary policy assessment presented under Federal Reserve Chairman Kevin Warsh, who assumed office in late May after Jerome Powell's term ended. Warsh is scheduled to testify before congressional committees next week during the Fed's twice-yearly monetary policy hearings, which were delayed earlier this year amid tensions between the White House and the previous Fed leadership.

The Fed has kept benchmark interest rates unchanged since December, but inflation concerns have persisted, particularly following the escalation of the U.S.-Israeli conflict with Iran earlier this year. Investors have increasingly priced in the possibility of rate increases later in 2026.

Policymakers remain divided on the outlook. Projections released after the June 16-17 Federal Open Market Committee meeting showed officials split between those favouring additional rate hikes and those expecting rates to remain unchanged or even decline.

One notable aspect of the report is its assessment of artificial intelligence as a near-term contributor to inflation. While Warsh has argued that AI should ultimately improve productivity and help reduce inflation over time, the report acknowledged that the immediate surge in demand for electricity, advanced semiconductors and other inputs required for AI expansion has added to price pressures before productivity gains have fully materialised.

The report also revived discussion around money supply, marking the first detailed reference to the measure since 2016. According to Reuters, the Fed noted that growth in M2, a broad measure of money including cash and readily accessible deposits, has returned to levels commonly seen during the 2010s.

The central bank said the unusually large increase in money balances accumulated during the COVID-19 pandemic has largely been reversed, suggesting that excess liquidity generated during that period has diminished. This could help restrain inflationary pressures going forward.

The renewed focus on money supply reflects broader debates following the pandemic, when massive fiscal transfers and abundant liquidity contributed to strong consumer demand amid global supply disruptions.

The report also reviewed various monetary policy rules that currently imply the need for higher interest rates. However, the Fed cautioned that such formula-based prescriptions should not be interpreted mechanically because they do not account for how the economy would have evolved under different policy paths.

Overall, the report portrays an economy that continues to expand at a moderate pace while facing persistent inflationary pressures driven by trade policies, geopolitical developments and the rapid expansion of AI-related investment, leaving the Fed with difficult policy choices in the months ahead.