The Bank of Korea forecast that the consumer price inflation rate will exceed the 2% target on the back of large performance bonuses paid by semiconductor giants such as Samsung Electronics and SK hynix and a buoyant stock market. When income rises and spending increases, prices tend to go up.
In a business report submitted to the National Assembly's Strategy and Finance Committee on the 9th, the Bank of Korea said, "Downward pressure on prices from falling international oil prices will be offset by expanding demand-side pressure from an improving economy, keeping inflation at an elevated level."
The Bank of Korea also said, "From the second half of this year, prices of petroleum products such as gasoline will decline, but prices of industrial goods and personal services will see larger increases," adding, "The inflation rate will remain above the target level."
June's consumer price inflation rate was 3.2%, exceeding the Bank of Korea's target of 2%. It was around 2% on Feb. 1–2, but since the Middle East war broke out, it has topped 3% starting in May.
The Bank of Korea expects prices to rise going forward due to higher incomes. Major corporations paid large performance bonuses, and the KOSPI surged, increasing the number of consumers whose asset values rose. When they spend more, prices go up.
The price diffusion index, which rises when domestic demand such as consumption improves, hit a record high since 2010 (excluding the COVID-19 period). The price diffusion index measures how broad-based overall price increases are. A Bank of Korea official said, "As the semiconductor cycle improves and income increases, it becomes a factor that pushes up prices."
The Bank of Korea sees the semiconductor supercycle continuing through next year. According to the Bank of Korea, the current semiconductor supercycle (expansion phase) has continued for 40 months since March 2023. This surpasses the average cycle length of 29 months across five cycles between 2000 and 2020.
The Bank of Korea said, "Global semiconductor conditions are expected to remain in expansion for a considerable period as infrastructure investment related to artificial intelligence (AI) applications increases," adding, "Major forecasting institutions generally expect the global semiconductor cycle to remain favorable at least through next year."
The Bank of Korea said it will intervene in the market to ease excessive volatility in the foreign exchange market. If the exchange rate rises sharply, it will supply dollars it holds to the market to slow the increase. The Bank of Korea said, "We will also pursue supply–demand improvements in parallel, including foreign exchange swaps with the National Pension Service and an extension of interest payments on excess foreign currency reserve requirements."