Bank of Korea Warns of Inflation Risks from Semiconductor Export Boom

SEOUL, Aug. 30 (Yonhap) -- South Korea's monetary policy should focus on preventing core inflation from spreading broadly and remaining elevated as robust exports spill over into the broader economy and intensify demand-side inflationary pressures, a central bank report said Sunday.

"As the recent strong performance in semiconductor exports spills over into domestic demand, there is a possibility that demand-side inflationary pressures will intensify in the future," said a report published by the Bank of Korea (BOK).

The recent boom in artificial intelligence (AI) infrastructure has pushed up semiconductor prices and improved South Korea's terms of trade, while the country has continued to benefit from robust semiconductor exports.

In the first quarter, South Korea's real gross domestic product (GDP) grew 3.8 percent from a year earlier, while real gross domestic income (GDI), which reflects changes in the terms of trade, expanded 13.2 percent.

When oil prices rise, GDI typically grows more slowly than GDP because deteriorating terms of trade weigh on the South Korean economy, which relies heavily on crude oil imports.

However, in the first quarter, rising energy prices stemming from lingering military tensions in the Middle East were offset by very strong semiconductor exports, helping GDI grow faster than GDP.

"As the terms of trade improve due to rising export prices, GDI growth is significantly outpacing that of GDP, thereby expanding real purchasing power," the report said. "This is likely to stimulate domestic demand in the future and increase upward pressure on prices."

In past cases of demand-pull inflation, including during the post-COVID-19 pandemic period, private consumption increased as improved purchasing power boosted spending, consequently fueling inflation, while companies eased cost pressures by raising retail prices.

In particular, when the core inflation rate exceeded the mid-2 percent range, prices of other items across nearly all sectors rose in tandem, fueling higher core inflation, the report noted.

It said that during periods of high demand, a demand-side shock could add up to 0.6 percentage point to core inflation after six quarters.

"When assessing future inflation trends, it is essential to closely monitor not only the pace of the economic recovery but also the speed and intensity with which income growth resulting from improved terms of trade spills over into domestic consumption," the report said.

"Monetary policy needs to ensure that the rise in core inflation does not spread widely and become entrenched."

The BOK raised the benchmark interest rate at two consecutive meetings Thursday to 3 percent, calling the move "unprecedented" but "preemptive" to curb mounting inflationary pressures as improved terms of trade boost domestic demand.