The Reserve Bank’s chief economist Sarah Hunter is warning the construction of AI data centres will keep inflation high without the new technology later solving Australia’s productivity crisis.

Dr Hunter said the capital investment in this new energy intensive artificial intelligence infrastructure was likely to see these projects compete for scarce material and labour resources during a time of high price pressures.

“So, what does this mean for inflation? The effect is likely to vary over time. In the near term, the positive shock to aggregate demand set against the economy’s current supply capacity will put some upward pressure on inflation,” she told the UBS Australasia conference in Sydney on Monday.

“Surging global AI-related investment has contributed to capacity pressures in supply chains for AI-enabling products such as semiconductors.

“These upstream cost pressures are passing through to the prices of some downstream goods in advanced economies.”

The building of these new data centres is also likely to see more competition for construction workers alongside housing and transport infrastructure projects, with the Housing Industry Association warning this demand for tradies could drive up inflation and interest rates that could cause Australia’s first bout of stagflation in more than four decades.

“Some liaison contacts are reporting that data centre construction is adding to demand for some already-stretched construction skilled trades,” Dr Hunter said.

The RBA’s assistant governor in charge of economic research also questioned whether AI would help solve Australia’s long run of weak productivity, noting estimated improvements to annual productivity growth ranged from 2 per cent to just 0.1 per cent.

“So far, there is limited evidence that AI has materially lifted aggregate productivity,” Dr Hunter said.

“Firms are taking time to invest and reorganise to realise the full benefits, while managing the new operational and resilience risks that the technology is creating.”

A lacklustre boost to productivity could also mean little effect on alleviating long-term inflation.

“This transition doesn’t mean AI will continually put downward pressure on inflation,” she said.

“Over time stronger demand is likely to accompany the increase in the economy’s productive capacity.

“Consistent with previous general-purpose technologies, AI’s long-run effect on inflation is likely to be broadly neutral.”

The economic benefits of AI were also likely to take longer to be realised.

“History suggests that the largest gains from transformative technologies often take longer to emerge than initially expected, but their long-run impacts can be profound,” Dr Hunter said.

“For central banks, understanding the transition and the end-state will therefore be critical.”

This would be after the construction of AI data centres was no longer contributing to Australia’s inflation crisis during a time of weakening economic growth.

“As a result, the initial inflationary pressures from AI investment are likely to dissipate,” Dr Hunter said.

Housing Industry Association chief economist Tim Reardon warned data centre construction is a “mini mining boom” that risked causing stagflation - or high inflation and high unemployment - as electricians and plumbers earning up to $9000 a week fed an interest rate rise cycle.

“It’s short-lived work - they’re not particularly sensitive to the cost of skilled tradespeople and they are taking workers out,” he told The Nightly.

“There is a risk we see a cycle of stagflation going ahead, we haven’t seen that really since the 1980s and that is a very unhealthy economic outcome.

“In part, elevated levels of government spending and investment in data centres could exacerbate that problem.”

The Reserve Bank is expecting the surge in data centre investment to see inflation climb to 4.5 per cent by the end of 2026, reviving levels last seen in March during the early weeks of the Iran war.

This would be occurring as economic growth slowed significantly to 1.3 per cent by the end of 2027, marking a sharp drop from the 2.1 per cent pace in the year to June 2026.

The observations were made a day after developers Stockland and John Boyd Properties scrapped plans for a data centre at Arncliffe in Sydney’s south, and weeks after the Goodman Group cancelled plans for a data centre at Lane Cove on Sydney’s lower north shore, with community protests forcing both decisions.

Another mega data centre planned for Plumpton, 30km northwest of Melbourne, proposed by Syncline Energy could also potentially take up spaces that could otherwise go towards new housing blocks.

“If they take land on the edge of residential cities, and turn it into industrial land, that’s less land for housing,” Mr Reardon said.

Data Centres Australia has argued these AI projects have the potential to boost productivity and underpin Australia’s long-term economic growth.