WASHINGTON — The Federal Reserve issued a stark warning Friday, telling Congress that U.S. inflation “stepped up further this spring” as a combination of tariff impacts, rising energy costs tied to conflict in the Middle East, and the rapid expansion of artificial intelligence technology pushed prices higher — adding to pressures that were already building late last year.
The report stated that “inflation has risen this year and remains elevated relative to the Federal Open Market Committee’s longer-run objective of 2%.” The Fed’s preferred inflation measure, the Personal Consumption Expenditures Price Index, was running at roughly double that 2% target as of May, according to the document.
On the jobs front, the picture was more encouraging. The Fed noted that “the labor market has stabilized, with demand and supply roughly in balance,” and described the June unemployment rate of 4.2% as still “low.” However, the report pointed to shifting trends affecting the workforce, noting that “a marked slowdown in immigration and ongoing declines in labor force participation due to the aging of the population led to a slowdown in labor supply growth.”
This report is the first monetary policy update to Congress submitted under new Fed Chairman Kevin Warsh, who took over in late May after former Fed Chair Jerome Powell’s term concluded. Warsh is scheduled to appear before both House and Senate committees next Tuesday and Wednesday for what are intended to be semi-annual congressional reviews of monetary policy. Those hearings were delayed earlier due to a dispute between Powell and President Donald Trump.
The Fed has kept interest rates unchanged since December. Concerns about continued inflation have led investors to expect the possibility of rate increases later this year.
The inclusion of artificial intelligence as a factor driving near-term inflation is significant. While Warsh has expressed optimism that AI could eventually help bring inflation down by boosting productivity, he has more recently acknowledged that the timing of those gains remains uncertain — even as demand for electricity, computer chips, and other materials needed to build out AI infrastructure continues to grow.
