--- title: Tariffs, Oil and AI Spending Are the Three Shocks Behind 3.7 Percent US Inflation description: Mary Daly's Tokyo slides put data center investment alongside tariffs and oil, and set out the two inflation paths the Fed is now weighing. author: Darie Nani (Editor-in-Chief) date: 2026-08-06T08:20:46.764Z updated: 2026-08-06T08:20:46.774Z canonical: https://www.sovereignmagazine.com/article/three-shocks-behind-us-inflation-daly-tokyo image: https://cdn.nanimediahouse.com/three-inflation-shocks-illustration-109396.webp categories: Economy content_type: News region: United States publication: Sovereign Magazine schema_type: Article --- US inflation ran at 3.7 percent in June, well above the Federal Reserve's 2 percent goal, and a Fed policymaker now puts the money going into AI data centers on the short list of reasons why. Mary Daly, president of the Federal Reserve Bank of San Francisco, made the case in [a keynote at the ESRI International Conference in Tokyo](https://www.frbsf.org/news-and-media/events/2026/08/mary-c-daly-esri-international-conference/), hosted by the Cabinet Office of the Government of Japan and delivered Thursday morning local time. Her slides, published by the San Francisco Fed, name three shocks behind what she calls a recent uptick: tariffs from April 2025, energy from March 2026, and AI, accelerating this year. The presentation carries the usual note that the views are hers rather than her bank's or the Federal Reserve System's. ## The AI Shock Is the Newest of the Three Real private-sector investment in [data centers](https://www.sovereignmagazine.com/article/anthropic-volta-bitdeer-norway-compute) reached $30 billion in the second quarter of 2026, measured in inflation-adjusted 2017 dollars. Investment in technology equipment and software more broadly reached $1.7 trillion on the same basis. Prices for technology equipment rose 11.4 percent in the year to June. All three figures come from the Bureau of Economic Analysis. The other two shocks are older and better mapped. Core goods inflation, which strips out food and energy, ran at 2.1 percent in June, and Daly sets it against US effective tariff rates. Crude oil traded at $84 a barrel on August 3, and energy prices were up 16 percent in the year to June. The Fed's conventional playbook sorts shocks into ones it responds to and ones it looks through, by whether they are temporary or persistent and whether they come from supply or demand. Daly puts all three of these on the same chart, running staff projections of their contributions to inflation out to 2028. ## One Path Fades, the Other Forces a Policy Change Daly's slides set out two ways this can go. In the first, the shocks behave the way shocks usually do. Inflation rises for a while and falls back as they fade, and the current, mildly restrictive policy stance gradually brings it to 2 percent without further action. In the second, the shocks overlap and amplify each other, inflation broadens and settles in, and, in the slides' words, "policy must be recalibrated to bring inflation down." ## Most Forecasters Expect the Mild Path The FOMC's June Summary of Economic Projections and the July Blue Chip Economic Consensus both point that way, and Daly shows three reasons they might be right. Businesses are struggling to pass costs on: the New York Fed's survey of service-sector firms and the Richmond Fed's manufacturing survey both show more firms expecting higher costs than expect to raise their own prices. Wages are not pushing: real labor compensation per hour grew 0.6 percent in the first quarter of 2026 against productivity growth of 2.8 percent. And long-run inflation expectations, across market pricing, professional forecasters and household surveys, are still sitting close to 2 percent. ## The Research That Keeps the Second Path Open Against that, Daly cites a forthcoming American Economic Review paper by Oliver Pfäuti, "The Inflation Attention Threshold and Inflation Surges." Its argument is that how much attention consumers pay to inflation feeds back into inflation itself, and that once prices cross a certain threshold people shift into a high-attention state. The slide sets that next to the record: headline inflation has averaged 3.9 percent since 2021 and stood at 3.7 percent in June. Nick Timiraos, who reports on the Federal Reserve, [wrote in a post on X](https://x.com/NickTimiraos/status/2085172199044899243) that Daly told the Tokyo audience the first scenario had been and remains her base case, but that the second has been gaining ground and that you should "be thoughtful enough to move it to the front." ## Daly Stops Short of Calling for a Policy Move Her closing slide asks for vigilance rather than action. It states that the FOMC faces bimodal risk and considerable uncertainty, that current policy is well positioned if the first scenario holds, that aggressive recalibration is likely required if the second one does, and that the committee must stay vigilant to each and be prepared to act. ## FAQ **Q: What is causing inflation in the US right now?** Daly's presentation attributes the recent uptick to three overlapping shocks: tariffs dating from April 2025, an energy shock from March 2026, and accelerating AI-related investment in data centers and technology equipment. **Q: What is the current PCE inflation rate?** Headline PCE inflation was 3.7 percent in the year to June 2026, against the Federal Reserve's 2 percent goal. It has averaged 3.9 percent since 2021. **Q: Are data centers causing inflation?** Daly treats AI investment as one of three contributing shocks rather than the cause. Her slides show $30 billion of real data center investment in the second quarter of 2026 and technology equipment prices up 11.4 percent in the year to June. **Q: What would make the Federal Reserve change course?** On Daly's account, it would take the second scenario arriving: the three shocks compounding rather than fading, so that inflation broadens and becomes persistent. Her slides say that outcome would likely require aggressive recalibration of policy.