Chicago Federal Reserve President John Goolsby said on Thursday (October 15) that September was a "disappointing month" for U.S. inflation. He added that he remains optimistic if inflation drivers subside quickly, but if price increases stem from overheated demand related to artificial intelligence, then that "must be addressed." This week's U.S. CPI and PPI data support the possibility of a Fed rate hike at its October 27-28 meeting. Nevertheless, investors are currently pricing in a 25% probability of a rate hike, down from 40% the day before the CPI data release.

Key takeaway: Disappointing inflation in September; overheated demand for AI must be addressed.

Goolsby described September as "a disappointing month for inflation." He stated that he remained optimistic if the inflation drivers subsided quickly. However, he explicitly warned that if price increases stemmed from overheated demand related to artificial intelligence, it would be more worrying and needed to be addressed. The core of this statement is that Goolsby categorizes inflation drivers into "temporary shocks" and "overheated demand." If inflation is driven by temporary shocks that subside quickly, he is willing to wait; but if inflation is driven by overheated demand from AI investments, a policy response is necessary. This distinction echoes the concerns of officials like Barkin and Collins regarding the breadth and persistence of inflation, all pointing to the same worry: the AI investment boom may be creating sustained demand-side inflationary pressures.

Market pricing: Probability of an October rate hike drops to 25%

This week's U.S. CPI and PPI data support the possibility of a Federal Reserve rate hike at its October 27-28 meeting. Nevertheless, investors are currently pricing in a 25% probability of a rate hike, down from 40% the day before the CPI data release. This shift reflects that despite the strong inflation data, market expectations for an October rate hike have cooled following comments from Fed officials.

Policy Implications: AI Demand Becomes a New Focus of the Inflation Debate

Goolsby's remarks place AI demand at the center of the inflation debate. Previously, Hammark also listed AI-driven capital expenditure and the wealth effect as policy targets, arguing that austerity measures aimed at curbing investment and asset-driven spending partly work through valuation. Goolsby's warning further reinforces this theme: if overheated demand from AI investment becomes a driver of inflation, then monetary policy may need to respond to this channel. This means that AI-related capital expenditure and tech stock valuations may indirectly become targets of monetary policy attention.

AI inflation theory reinforces tightening expectations, but October pricing cooling limits upside.

Goolsby's remarks have a two-way impact on the US dollar index. On the one hand, he defines the overheated demand for AI as a source of inflation that "must be addressed," a framework that reinforces the Federal Reserve's reasoning for maintaining a tightening stance—if AI investment-driven demand continues to push up inflation, the Fed will lack the space to shift to easing, providing medium-term interest rate differential support for the dollar. Currently, the dollar index is trading around 102, in its highest range since April 2025, and this hawkish narrative is one of the core logics for the dollar's continued strength. On the other hand, the market's pricing in an October rate hike has fallen from 40% to 25%, reflecting a cooling of expectations following the Fed officials' remarks, which limits the dollar's short-term upside potential. In summary, Goolsby's AI inflation theory provides support for the dollar's expectation of "higher and longer" interest rates, but the decreased probability of an October rate hike means insufficient momentum to break through previous highs in the short term. The next direction of the dollar index depends on whether subsequent data confirms the overheated demand driven by AI—if confirmed, the dollar may gain new upward momentum; if inflation drivers subside as Goolsby hopes, the dollar's interest rate differential advantage will face erosion. (US Dollar Index Daily Chart, Source: FX678)

Summarize

Goolsby described September as a disappointing month for inflation, but remained optimistic that the inflation drivers would soon subside. However, he explicitly warned that if price increases stemmed from overheated demand related to artificial intelligence, it would be more worrying and must be addressed. This statement places AI demand at the center of the inflation debate, echoing Hammark's previous remarks on AI capital expenditure and the wealth effect. This week's CPI and PPI data support the possibility of an October rate hike, but the market's pricing of a rate hike probability has fallen from 40% to 25%, reflecting a cooling of expectations following comments from Fed officials. For the market, whether AI demand becomes a sustained driver of inflation will be one of the key variables determining the Fed's policy path. If overheated demand driven by AI proves to be the main source of inflation, monetary policy may need to respond to this channel, which will indirectly affect tech stock valuations and overall risk appetite. At 8:12 AM Beijing time, the US dollar index was at 102.06.