The Impact of Inflation on Data Centers

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I recently reflected on the impact of inflation rates and historically high interest rates on data center growth and, therefore, demand for digital storage and memory. Let’s first look at recent US inflation and interest rate announcements, then discuss their possible impact on data centers.

According to the U.S. Bureau of Labor Statistics, “The annual rate of inflation in the United States unexpectedly accelerated to 8.6% in May 2022, the highest since December 1981 and relative to forecasts for the market by 8.3% Energy prices rose by 34.6%, the strongest since September 2005, due to gasoline (48.7%), fuel oil (106.7%, the largest increase on record), electricity (12%, the largest 12-month increase since August 2006), and natural gas (30.2%, the most since July 2008).

The cost of food jumped 10.1%, the first increase of 10% or more since March 1981. Large increases were seen in the prices of meat, poultry, fish and eggs (14.2 %). Other increases were also seen in the cost of housing (5.5%, the highest since February 1991), home furnishings and operations (8.9%), used cars and trucks (16 .1%) and air fares (37.8%), while the cost of new vehicles decreased. slightly (12.6% against 13.2%). »

Several factors drive this inflation, including supply chain issues and shortages of critical components and infrastructure (e.g. shortages of fuel refining capacity) as well as government spending in an attempt to avoid a major recession during the COVID pandemic.

Projections for the annual inflation rate in June are similar to the May figures. The Federal Reserve responded to the sharp rise in inflation by raising interest rates. On June 15, it raised interest rates by 0.75%, its third hike this year and the biggest since 1994.

Financial analysts point out that these interest rate hikes could push the US economy into a recession. Right after this announcement, the S&P 500 stock index fell 20% from its January 2022 peak. Although the market rallied on July 1, there are still serious concerns about the health of the US economy.

As the economy may face spending pressures, the demand for storing and processing digital information is growing and is a key part of the digital transformation underway in many businesses. Continued digitization will be critical to the success and increased business opportunities for these companies. What does this mean for digital storage and memory demand, especially for enterprise and data center applications?

If the economy enters a major recession, many businesses will have less revenue, putting pressure on spending plans, including storage and memory spending. This will impact storage and memory businesses and we may see early signs of slowing demand and lower prices for various memory technologies (although this could also be due to the implementation of new memory production capacity and increased supply).

However, many storage and memory end users will want to pursue their digitization plans because they see it as the future of their business. The result could be an even stronger incentive to spend money on additional technical capabilities as an operating expense, used only when needed, rather than a capital expense. This could boost demand for cloud storage and other services.

Additionally, the expansion of remote work during the pandemic and the continuation in the future for many professional workers (with at least two days a week working outside the office) makes cloud-based services, which they use private or public clouds, essential for many companies.

Stephane Daniel in the May 2022 Digital Storage Technology Newsletter said: “From 2022, the number of employees working from home at any given time of the week will increase… thanks to a more informed awareness of the benefits of working from home, as well as improvements and changes to the work-from-home environment and supporting infrastructure By the end of 2026, the number of employees working fully or partially from home will have increased by 35% compared to pre-COVID-19 levels »

Another important factor that could continue to drive the use of online meeting services is the higher cost and logistical challenges of traveling in today’s post-COVID and post-Ukrane invasion world.

So while cloud storage and memory spending may show more short-term reductions, it should be one of the fastest-rebounding technology areas to meet the needs of modern businesses. With the rise of efficient data management for multi-cloud and multi-site data, spending on this part of the storage and memory business will have the fastest return on investment.

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Ramon J. Espinoza