Could Australia’s AI Investment Boom Keep Inflation and Interest Rates Higher?

Artificial intelligence promises to lift productivity, but the enormous investment required to build it could make Australia’s inflation problem harder in the short term.

That is the argument from Jonathan Kearns, a former Reserve Bank of Australia official and now chief economist at Challenger, who warned this week that the AI investment boom is adding to demand at a time when the economy is already facing capacity constraints.

Why AI spending can push prices up

Building a data centre requires land, construction crews, electrical infrastructure, specialist engineering, cooling systems, networking equipment and substantial power supply. Some equipment is imported, but many of the services and inputs are bought locally.

When multiple projects compete for scarce workers, contractors, electricity connections and building capacity, prices can rise. That is the inflationary mechanism Kearns is highlighting: investment is expenditure today, while the hoped-for productivity benefits arrive later.

Official investment figures support the scale of the boom

The ABS reported on 28 May 2026 that private new capital expenditure rose 6.5% in the March quarter, partly driven by purchases of data-centre server racks and processing equipment. Non-mining business investment rose 8.8% and information media and telecommunications investment recorded a large increase.

The imported-equipment caveat

Kearns told Reuters that around three-quarters of data-centre investment spending may relate to imported equipment. Imports reduce the immediate pressure on domestic productive capacity compared with spending the entire amount locally.

But the remaining domestic component can still be substantial when projects are large. Import prices, exchange rates and global demand for advanced chips can create additional cost pressures.

The RBA’s current position

On 29 September 2026, the RBA increased the cash rate target by 25 basis points to 4.60%, effective 30 September. In its official statement, the central bank pointed to elevated inflation, higher global energy prices and rapid AI-related demand affecting technology goods prices.

The RBA did not adopt Kearns’s personal forecast as official policy. Its next monetary policy decision is scheduled for 3 November. Future decisions depend on inflation, employment, growth and other evidence, not on one economist’s comments.

Source: RBA monetary policy statement, 29 September 2026.

What the electricity forecasts actually say

AEMO’s August 2026 forecast expects data-centre electricity use in the National Electricity Market to grow from about 5 terawatt hours in 2025–26 to 34 TWh by 2035–36. That could lift the sector’s share of grid-supplied electricity from around 3% to 13%. These are projected future loads, not existing consumption, and AEMO accounts for projects that never connect or ramp up gradually.

The effect on household bills depends on how new generation, storage, transmission, connection charges and network costs are funded. It would be misleading to translate the forecast directly into a fixed increase in household electricity prices.

Why households could carry more of the burden

AI infrastructure investors may keep spending despite higher interest rates because they are competing to secure scarce computing capacity and customer contracts. If this spending is less sensitive to rates than household borrowing, monetary policy may have to restrain other parts of the economy more heavily.

That could mean tighter conditions for mortgage holders, smaller businesses and consumer-facing industries. It is a possible distributional effect, not a prediction that any particular mortgage rate will rise.

When productivity benefits might arrive

The long-term case for AI rests on better services, faster research, automation and more efficient business processes. Those benefits are not guaranteed merely because a data centre is built.

Businesses must integrate the technology into real workflows, train staff, measure accuracy and redesign processes. Kearns argued that broad productivity gains are more likely when organisations change how work is performed, rather than simply use AI to complete existing tasks slightly faster.

What could weaken the inflationary effect

• More imported rather than domestically constrained inputs.
• Faster investment in electricity generation and transmission.
• Higher labour supply and productivity in construction and engineering.
• Slower-than-expected data-centre build-out.
• A broader slowdown in consumer and business demand.

Conversely, energy disruption, power-network delays or an acceleration in construction could make the pressure more persistent.

Sources and context

Reuters, 9 October 2026; RBA cash-rate overview.

Three questions before predicting higher rates

First, will construction demand outpace available workers, equipment and grid connections? Second, will higher technology costs spread beyond the sector? Third, when might productivity improvements offset the investment costs?

The RBA’s 29 September decision cited technology-related prices alongside energy costs and domestic capacity pressures. It did not say AI alone caused the cash rate to reach 4.60%.

AI-generated image created for NextNews.

The bottom line

Australia could experience a paradox: investment in technology designed to make the economy more productive may temporarily increase costs and complicate the fight against inflation. The critical question is how quickly real productivity improvements catch up with the investment boom.

Important disclaimer

This article is general news and information, not financial, economic, lending, investment or tax or other professional advice. It should not be relied upon as advice tailored to your circumstances. Verify current facts, rules and market conditions, and seek independent advice from appropriately qualified professionals before making decisions or taking action. See the NextNews disclaimer.