Key Highlights

  • The RBA lists strong AI-related Investment as an upside risk to inflation.
  • Building AI infrastructure draws on labour, land and equipment already in demand.
  • The risk is greater when Inflation is above target and capacity is tight.
  • The scenario is illustrative rather than a forecast.

It is not every day that a Central Bank names a technology trend in its list of inflation risks. The November 2026 Statement on Monetary Policy (SMP) does exactly that. Alongside a prolonged energy disruption, the Reserve Bank of Australia (RBA) identifies strong AI-related investment as one of the upside risks to its inflation outlook.

The SMP sets out an AI Demand scenario in which stronger AI-related demand could keep global growth and inflation higher, and add to domestic capacity and construction cost pressures. It is not a forecast.

A boost already visible in the data

AI is not only a hypothetical in the RBA's analysis. The SMP notes that economic activity this year has been somewhat stronger than expected, helped by data centre investment. Data centres are the physical backbone of AI: large buildings filled with computing equipment that need power, cooling and construction labour.

The RBA's near-term growth forecasts were revised up. Year-ended GDP growth for June 2026 is now estimated at 2.1 per cent, up from 1.9 per cent in the August forecast. December 2026 growth is forecast at 1.6 per cent, up from 1.4 per cent.

In ordinary times, stronger investment is welcome news. The difficulty is timing. When inflation is above target and capacity is tight, which the RBA cites as one reason for revising its wage forecasts higher, extra demand for workers, materials and energy can add to price pressures before any productivity benefits arrive.

How AI demand could feed inflation

The SMP describes the AI scenario in broad terms. Its key elements are:

  • Global growth and inflation. Stronger AI-related demand around the world could keep global growth and inflation higher than in the central forecast, which can feed into the prices Australia pays for imported goods and services.
  • Domestic capacity. Building and operating AI infrastructure locally draws on labour, land and equipment that are also needed elsewhere in the economy.
  • Construction costs. Large construction projects such as data centres compete for tradespeople and building materials, adding to construction cost pressures.

The construction channel is notable because it intersects with other parts of the RBA's outlook. The SMP forecasts dwelling investment growth of -2.8 per cent in December 2027 and -1.8 per cent in December 2028, as falling housing prices and turnover weigh on home building. In principle, weaker housing construction could free up some capacity. The AI scenario points to the possibility that demand from other forms of building keeps construction cost pressures elevated anyway.

The capacity question

Underlying all of this is a question the RBA openly says it cannot answer with certainty: how much spare capacity does the economy have? The SMP notes that capacity uncertainty cuts both ways. Pressures may be understated, which would mean extra demand from AI investment is more inflationary than it appears. Or labour Supply may be stronger than assumed, which would push Unemployment higher.

Governor Michele Bullock pointed to a related constraint in her opening statement to the Senate Economics Legislation Committee on 28 October: "continued weak productivity growth means that the economy cannot grow strongly without putting pressure on inflation."

That observation helps explain why an investment boom, even one built around a technology that may eventually lift productivity, is treated as an inflation risk in the near term.

The RBA's interest in AI is not limited to monetary policy. Its October 2026 Financial Stability Review noted that optimism about AI has been boosting asset prices, and pointed to less transparent long-term Debt Financing for AI investment. The review also flagged a global vulnerability to a "sharp and potentially disruptive adjustment", citing high sovereign debt, high asset prices and growing leverage.

The same review said that "the Australian financial system remains resilient, but there's no room for complacency."

How the scenario fits the RBA's risk balance

The AI scenario is one input into the RBA's overall judgement that domestic inflation risks remain skewed to the upside. The other main upside scenario involves energy: if Crude Oil stays around US$100 a barrel with elevated refined product prices, underlying inflation would be around 2¾ per cent by end-2028, rather than about 2½ per cent.

There are downside risks too. The SMP says inflation could fall faster if higher rates and falling housing prices weigh on spending. In a downside activity scenario, if households and businesses respond more strongly to oil prices, interest rates and lower house prices, GDP would be about 1.0 per cent lower by end-2028 and unemployment 0.3 percentage points higher, with inflation only modestly lower.

For context, the RBA's central forecasts, which do not assume the AI upside scenario, have headline CPI peaking at 4.5 per cent in the December quarter of 2026 and both headline and trimmed-mean inflation reaching 2.5 per cent in mid-2028. The latest data show the trimmed mean rose 3.7 per cent over the year to the September quarter, while headline CPI rose 3.9 per cent over the same period and 4.3 per cent over the year to the month of September.

The forecasts assume a cash rate path drawn from market pricing as at 28 October 2026, implying a rise of about 35 basis points by mid-2027 before stabilising at 4.8 per cent in 2028. That is market pricing, not a commitment by the RBA.

On 3 November, the Monetary Policy Board lifted the cash rate target by 25 basis points to 4.85 per cent, with six members in favour and three preferring to hold at 4.60 per cent. The statement noted that "There continue to be heightened uncertainties about the outlook for domestic economic activity and inflation."

The bottom line

The November SMP treats strong AI-related investment as a genuine upside risk to inflation. Data centre investment has already helped make activity this year somewhat stronger than expected, and the RBA's scenario shows how stronger AI demand could keep global growth and inflation higher while adding to domestic capacity and construction cost pressures.

The scenario is illustrative rather than a forecast, and the RBA does not put a number on its inflation effect. But it sits alongside energy as one of the reasons the Bank sees inflation risks tilted upwards. As the Board's statement put it, "the Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions."