AI demand is now an inflation risk: Bank of England

The Bank of England has named demand for AI hardware as a risk to UK inflation.

The Monetary Policy Committee set out the risk in the minutes of its meeting ending on 29 July 2026, which the Bank published on Thursday (30 July).

Members identified strong demand for AI related components as a source of sector specific price pressures and listed it alongside the impact of El Niño on global food prices as part of a global environment that risks becoming more inflationary.

The Committee noted that some of these risks could interact with one another and with commodity price developments in potentially inflationary ways, and said it would continue to monitor those dynamics and their implications for the inflation outlook.

Four of the nine members referred to AI supply constraints in the rationale for their individual votes on Bank Rate. Dave Ramsden, Deputy Governor for Markets and Banking at the Bank of England, said bottlenecks in AI supply chains and the impact of El Niño on food prices may add to inflationary pressures.

Sarah Breeden, Deputy Governor for Financial Stability, said global supply shocks including those related to climate and AI could reinforce one another and increase the likelihood of more material second round effects.

Megan Greene, an external member of the Committee, listed supply constraints for AI related hardware alongside a second energy choke point in the Red Sea and El Niño.

July’s decision and looking forward

The Committee voted by a majority of six to three to maintain Bank Rate at 3.75%.

Andrew Bailey, Governor of the Bank of England, Breeden, Swati Dhingra, Clare Lombardelli, Ramsden and Alan Taylor voted to hold.

Greene, Catherine L Mann and Huw Pill voted to increase the rate by 0.25 percentage points to 4%. The rate has stood at 3.75% since December, after four reductions during 2025.

CPI inflation fell to 2.6% in June, with motor fuel prices contributing 0.6 percentage points to that figure. The Committee expects inflation to rise later this year as higher energy prices continue to pass through, and judged that risks to the inflation outlook tilt to the upside relative to the central projection in the July Monetary Policy Report.

The Brent crude front month future stood at $84 per barrel and the UK front month natural gas future at 136 pence per therm at the close of business on 28 July, both materially above the levels that preceded the conflict in the Middle East.

The three members who backed a rise took less reassurance from the underlying disinflation process and pointed to inflation that has exceeded the 2% target for more than five years.

Mann identified the collapse of the memorandum of understanding between the United States and Iran, the widening of the Middle East conflict and the associated energy price volatility as the key change in her decision.

Pill said he remains concerned about more insidious second round effects driven by catch up dynamics in wage and price setting, which could prove more lasting and create greater intrinsic inflation persistence.

Greene said staff analysis illustrates that setting policy as if there are stronger second round effects and course correcting if they prove smaller is less costly than the reverse.

The Committee found little evidence of material second round effects so far, but noted that lags in pass through mean current data carries a weak signal about whether such effects emerge later.

Members agreed that the likelihood of material second round effects remains the key uncertainty around the appropriate policy response.

The stock of UK government bonds held for monetary policy purposes stood at £491 billion on 17 July. The Committee next meets on 16 September, with minutes due on 17 September 2026.

Now read: Aston Martin is now timing its US shipments around Trump’s tariffs