Investment in the infrastructure needed to power artificial intelligence has helped push equity markets to record highs, creating a wealth effect that is supporting consumer spending among higher-income households, write RSM US economists Joe Brusuelas and Tuan Nguyen in the July-August issue of The Real Economy.
But the forces that have propelled the American economy have not benefited everyone equally. As Brusuelas and Nguyen explain, the economy has become increasingly K-shaped, with higher-income households benefiting from rising asset values while lower-income households continue to face financial strain. Their analysis suggests that relying on equity market gains to drive broader economic growth is ultimately an ineffective policy approach.
Also in this issue, Brusuelas analyzes the rise in inflation spurred by the energy shock and the quandary it presents for the Federal Reserve under its new chair, Kevin Warsh. With inflation accelerating, the prospect of a Federal Reserve interest rate cut in the near term has been put on hold. In addition, the recent surge in defense spending is helping lift manufacturing and overall economic activity, yet it also poses a risk of higher inflation as demand for goods outpaces supply, he notes.
