The AI inflation roller coaster

The economy this week delivered a split screen: the data looked mediocre but not disastrous, while the public mood was dark enough to rival the Great Recession. The personal consumption expenditures price index came in at 4.1%, which looks alarming, but much of that was driven by gasoline prices that have since fallen. Gross domestic product grew at an acceptable 2.1% annual rate. And yet consumer sentiment is abysmal — lower than during the worst of the 2008 financial crisis. The disconnect between the numbers and how people feel is the story that ties together inflation, interest rates, the AI boom, and a surprising health care experiment.

Inflation, rates, and a Fed chair caught in the middle

The core inflation reading — which strips out volatile food and energy — remains well above the Federal Reserve's target and has been there for roughly five years. Chicago Fed President Austan Goolsbee noted on the program this week that inflation is becoming "sticky in services," meaning it is not just a fuel problem. That has markets increasingly betting that Kevin Warsh, the new Fed chair appointed by President Trump, will have to raise interest rates rather than cut them — the opposite of what Trump hoped for when he made the appointment.