Even after stripping out food, energy, and trade services, wholesale inflation — often a leading indicator for consumer prices — is running at its highest level since 2022. Simultaneously, three structural forces are generating new pressures on prices.

- Allianz Investment Management sees the heatwaves in Europe as a potential catalyst for permanent policy change.

- Goldman Sachs argues that inflation linked to AI has been underestimated as costs bleed into adjacent sectors — and most data-center spending hasn't even landed yet.

- And the International Monetary Fund warns of wealthier households driving prices higher through demand.

In other words, inflation is being driven by the cost of economic transformation. Let’s get into the implications of each.

1 - EXTREME WEATHER

Nearly three quarters of the U.S. population live in parts of the country that are expected to experience dangerous temperatures on Thursday. In Europe — which is warming two times faster than the global average — excessive heat has been linked to 1,300 deaths and caused disruption to working hours since June 21.

🏁 The Signal: Extreme weather risk is becoming a recurring business cost, not an occasional weather event. This is the new baseline that business and public sector leaders need to consider.

“The heatwave is not an exception, it is a direction,” Katharina Utermöhl, head of thematic and policy research at Allianz Investment Management told The Guardian.

“It would be better to stop treating it as a summer problem and start treating it as a permanent economic policy challenge.”

▶️ The Play: Global enterprises with increasing exposure to the effects of climate change should plan for workers to have more flexibility and to invest in updating aging buildings and infrastructure.

“The episode could add further political momentum behind decarbonization, climate adaptation, electrification, and energy-efficiency investment,” UBS strategists also suggest.

🔮 The Future: The effects of climate change are a driver of inflation because extreme weather impacts both the supply and demand sides of the economy, as I wrote back in 2022.

The European Central Bank is concerned that climate-change-related food inflation could increase and become more difficult to forecast, for example. Experts also worry about the impact on energy prices, as evidenced by the effects of the 2021 Texas Freeze.

In the near term, businesses may call out this summer’s weather as cause for lost productivity or diminished earnings — particularly if they are in industries like construction and agriculture. 

2 - THE AI RACE

Apple, Nintendo, Microsoft, and Sony are among companies that have recently announced price hikes as AI projects suck up chip supplies. The cost per gigabyte of DRAM memory, for example, has shot upward by almost 1,000% since 2023.

HP, Dell, Lenovo, Acer, Asus, Motorola, and Samsung have also raised prices on computers and phones, while TVs, Bluetooth speakers, cars with infotainment systems and smart appliances may also get pricier.

Then there are spillover costs from data center builds. In addition to chips, think: higher wages for in-demand construction workers (already up 6.5% over last year as of the spring), higher electricity costs (to rise about 6% annually this year and next for consumers), and potentially higher costs for equipment like cooling systems, generators, and fiber-optic cables, WSJ notes.

🏁 The Signal: AI is a demand shock across the enterprise and consumer. Productivity gains may ease inflationary pressures down the line, but for now, Goldman Sachs analyst Manuel Abecasis argued that inflation linked to AI has been underestimated.

He suspects effects could cool as soon as Q4 this year for things like software and accessories. But 81% of economists say AI build-outs will add to inflation over the next year, according to a National Association for Business Economics survey.

I think it’s safe to say that with only a small portion of announced spending on data centers in place, pricing pressure will likely outpace any disinflation.

▶️ The Play: Most consumer electronics companies can’t confidently raise prices, CNBC notes. Those who do risk losing their customers.

At the same time, businesses have room to absorb cost shocks and avoid cuts like layoffs, RBC Economics notes. “Corporate profit margins remain elevated as a share of gross value added (GVA) — sitting at 18% — unseen since 1965,” they write.

🔮 The Future: With price hikes eating into wages and purchasing power, I don’t see many scenarios in which consumers don’t start trading down more frequently. The tradeoff then is sacrificing legacy product lines.

3 - THE WEALTH EFFECT

AI may stoke inflation not only by driving up the cost of precious computing, but also by making the people who own AI stocks richer — and readier to spend, IMF chief economist Pierre-Olivier Gourinchas told Bloomberg. "These demand pressures, they generate inflation," he said.

Also boosting confidence and coffers? Record home values: household net worth growth in Q1 got a boost in large part from residential real estate, while stocks pulled back, KPMG notes.

🏁 The Signal: The economy in the near term feels “very dependent” on the top of the K-shaped economy, which isn’t a “very healthy situation,” Moody’s chief economist Mark Zandi said on a podcast published mid-June.

Part of the risk is the wealth tied up in the AI boom, he noted. If the market goes down, the top of the economy may become more cautious and start to pull back. “Then we got a problem.”

▶️ The Play: Do not mistake strength at the top of the economy for broad-based demand. Also, understand where you can diversify.

Because even among corporates, a K-shaped pattern is emerging, Zandi said, noting that Russell 2000 companies have seen margin growth stalling and revenue per employee falling.

🔮 The Future: Higher interest rates could be on the horizon if inflation remains elevated, Cleveland Federal Reserve President Beth Hammack, a voting participant on this year’s rate-setting FOMC, told CNBC.

How high they’d need to go is an open question. After all, wealthier Americans didn’t feel the pinch as much as economists expected after past hikes went into effect.

tldr: The price of economic transformation is becoming part of the inflation story.

Do you agree? Email me and let me know.

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