AI chip exports are booming, South Korea's inflation hits a 30-month high.

South Korea's inflationary pressures continue to heat up, and the AI chip export boom is evolving from an economic growth engine into a new source of price risk.

According to data released by the Korean National Statistical Office on Thursday, the Consumer Price Index (CPI) in June rose 3.2% year-on-year, the fastest pace since December 2023, exceeding 3% for the second consecutive month and significantly above the Bank of Korea's 2% target level.

Meanwhile, South Korea's exports surged 71% year-on-year in June, with monthly exports surpassing $100 billion, setting a historic record, driven mainly by semiconductor exports.

Persistently above-target inflation has heightened market expectations for a rate hike by the Bank of Korea. The Bank of Korea is scheduled to hold its rate decision meeting on July 16, with most economists expecting the central bank to begin raising rates as early as that month. Governor Rhee Chang-yong has previously stated clearly that rates should be raised "before it's too late."

Energy and exchange rates push up prices, chip boom brings new concerns

June inflation data showed that petroleum products were the main source of price increases. **Data showed that gasoline and diesel prices rose 23% and 34% year-on-year, respectively. The weakening won and cumulative increases in raw material costs continue to transmit through the economy, **although the US-Iran ceasefire agreement has to some extent eased tensions in the Middle East, reducing energy price pressures.

Excluding volatile food and energy prices, core CPI rose 2.5% year-on-year, unchanged from the previous month and still above the central bank's target.

Meanwhile, the chip industry boom driven by the AI craze is complicating the inflation outlook. In a report released on June 17, the Bank of Korea warned that unusually generous bonuses issued by chip giants such as Samsung Electronics and SK Hynix could trigger cross-industry wage competition, transmitting through consumption expansion and labor markets, spreading wage pressures to broader areas and forming a "self-reinforcing inflation" vicious cycle.

Record exports, strong economic growth momentum

South Korea, a highly trade-dependent economy, has performed remarkably this year. June exports surged 71% year-on-year, with monthly exports exceeding $100 billion, the strongest growth in nearly 50 years, driven by semiconductor exports, benefiting from sustained strong chip demand driven by global AI infrastructure construction.

Citigroup economist Jin-Wook Kim noted in a recent report that strong semiconductor exports and manufacturing activity continue to support steady economic growth, and additional fiscal stimulus measures and increased investment in technology infrastructure later this year are expected to further boost growth momentum.

The Bank of Korea is expected to again raise its 2026 growth forecast in its August quarterly economic outlook update. In May, the central bank raised its 2026 economic growth forecast to 2.6% and its 2027 forecast to 2.1%; during the same period, it raised this year's inflation forecast to 2.7% and next year's to 2.3%.

Rate hike expectations heat up, central bank faces policy choice

At its last policy meeting in May, the Bank of Korea held steady but clearly signaled it would raise rates in the coming months, citing upside risks to both growth and inflation. With June inflation data again exceeding expectations, market expectations for a rate hike at the July 16 meeting have further strengthened.

The central bank warned last month that if strong wage increases in the semiconductor sector spread across the economy, they would reinforce inflation through dual channels of higher costs and stronger consumer demand. As the Middle East-driven energy inflation risk gradually fades, the wage-inflation spiral triggered by the AI boom is becoming the next challenge for the central bank to address.

Risk Warning and Disclaimer

        Market risk is significant; investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this content is at your own risk.