AI Inflation Crisis Could Derail 2026 Economic Boom

The love for AI could be a dangerous thing.

Global stock markets that surged to record highs on enthusiasm for AI and easier monetary policy may be overlooking a growing risk that could derail the rally: a renewed upswing in inflation driven in part by the technology investment boom itself.

U.S. stock indexes posted double-digit gains in 2025, with just seven major technology groups accounting for roughly half of total market earnings. Optimism surrounding AI adoption, combined with expectations of falling interest rates, also helped lift European and Asian equities to record peaks. Bond markets joined the rally as easing inflation boosted hopes of further rate cuts, delivering U.S. Treasury investors their strongest annual returns in five years.

However, as Reuters notes, inflation has not fully retreated. Price growth in the U.S. remains above the Federal Reserve’s 2% average target, and money managers increasingly fear that the forces now driving global growth in 2026 could reignite price pressures.

Stimulus and shift

Looking ahead, large-scale government stimulus in the U.S., Europe, and Japan, alongside the continued expansion of AI-related investment, is expected to fuel economic activity. While stronger growth is typically welcomed by markets, it also raises the risk that inflation could re-accelerate, forcing central banks to reconsider their rate-cutting cycles.

“You need a pin that pricks the bubble and it will probably come through tighter money,” said Trevor Greetham, head of multi-asset at Royal London Asset Management. He said that while he was holding on to big tech stocks for now, he would not be surprised to see inflation booming worldwide by the end of 2026.

A shift toward tighter monetary policy would have wide-ranging implications. Higher interest rates would curb investors’ appetite for speculative assets, raise borrowing costs for capital-intensive AI projects and ultimately squeeze profits and valuations across the technology sector.

Inflationary cost of AI infrastructure

Analysts point to the sheer scale of investment required to support AI as a key inflationary force. Hyperscalers such as Microsoft, Meta, and Alphabet are engaged in a multi-trillion-dollar race to build data centers capable of handling AI workloads. These projects require vast quantities of electricity, advanced semiconductors and specialised hardware, all of which are already facing supply constraints.

“The costs are going up not down in our forecast, because there’s inflation in chip costs and inflation in power costs,” said Morgan Stanley strategist Andrew Sheets. He added that U.S. consumer price inflation would likely remain above the Federal Reserve’s 2% target until the end of 2027, partly due to heavy corporate investment in AI.

This creates a feedback loop for markets. Rising costs push inflation higher, which in turn increases the likelihood of tighter policy. That can undermine the very growth and earnings expectations that have driven technology stocks to lofty valuations.

Markets show early strains

Some investors note that markets have already begun to reflect unease about rising costs and the sustainability of AI spending. Oracle shares fell last week after a key financial partner said it would not help fund a major AI data center. Earlier, Oracle’s stock plunged after the company revealed a sharp jump in spending, while Broadcom shares dropped after warning that margins could be squeezed.

Personal computer maker HP expects pressure on prices and profits later in 2026 as memory chip costs rise due to surging data center demand. Deutsche Bank estimates that AI data-center capital expenditure could reach as much as $4 trillion by 2030, warning that rapid expansion risks creating bottlenecks in chips and electricity that could send costs spiralling.

“What keeps us awake at night is that inflation risk has resurfaced,” said Julius Bendikas, European head of economics and dynamic asset allocation at Mercer, which manages $683 billion directly and advises on $16.2 trillion in assets. While he is not yet predicting a stock market correction, he said he is reducing exposure to debt markets that could be hit hardest by an inflation shock.

Valuations and investor strategy

Concerns about inflation are also prompting investors to reassess valuation assumptions. Higher inflation and interest rates typically lead to lower price-earnings multiples, particularly for growth stocks whose earnings are expected further in the future.

“Inflation is what could start to scare investors and cause markets to show some cracks,” said Kevin Thozet, investment committee member and portfolio manager at Carmignac. With the global growth cycle accelerating, he said inflation risk remained underappreciated, leading him to increase holdings of inflation-protected Treasuries.

George Chen, partner at consultancy Asia Group and a former senior Meta executive, said rising costs could eventually cool enthusiasm for AI investments. “Memory chip cost inflation will push up prices for AI groups, lower investors’ returns and then the flow of money into this sector will reduce,” he said.

As 2026 unfolds, markets face a delicate balance. The same forces powering growth and technological transformation may also revive inflation, challenging central banks and testing whether the AI-driven rally can withstand a less forgiving monetary environment.

In 2025, AI startups raised $150 billion, setting a new high for venture capital investment.

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