Bank of Korea warns: Huge bonuses at AI chip companies may spread across the entire industry, intensifying inflationary pressures

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The boom in South Korea’s chip industry driven by the artificial intelligence craze is complicating the country’s inflation outlook. The Bank of Korea has warned that unusually generous bonuses distributed by chip giants such as Samsung Electronics and SK Hynix could trigger cross-industry wage competition, pushing up consumer demand and corporate costs, and becoming a new source of inflationary pressure.

On June 17, the Bank of Korea released a report noting that the issuance of high bonuses by some chip companies may raise pay raise expectations among employees in other industries, and through expanded consumption and transmission in the labor market, spread wage pressures into wider areas. Central bank governor Shin Hyun Song stated that persistently high inflation may reinforce consumers’ inflation expectations and increase the possibility of companies raising prices, forming a vicious cycle of “self-reinforcing inflation.”

Meanwhile, the energy price shock caused by the Middle East war has further exacerbated South Korea’s inflationary pressures. In May, South Korea’s Consumer Price Index (CPI) rose 3.1% year-on-year, the fastest increase in more than two years. Shin Hyun Song made it clear last week that the central bank should “raise interest rates before it’s too late.”

Against this backdrop, the wage diffusion effect driven by AI and the energy shock are overlapping, presenting policymakers with more complex policy trade-offs.

Three transmission paths of bonus diffusion

The Bank of Korea’s report details the mechanisms by which high bonuses in the tech industry are transmitted to the broader economy.

First, the wage competition effect. After leading tech companies significantly boost compensation, employers in other industries may be forced to follow suit in raising wages to retain workers, increasing labor costs across all sectors.Second, consumer demand effect. Income growth among tech industry employees will directly boost service consumption expenditures, driving expansion in demand for services such as catering, retail, and entertainment, and subsequently pushing up related prices.Third, spillover effect in the labor market. Rising demand in the service sector will lead to increased hiring in this area, further tightening the labor market and generating a new round of wage pressure.

The central bank pointed out that although there are currently no signs of widespread and accelerated wage increases, the unusually high bonuses and rising demands for pay raises already warrant close attention. Policymakers need to guard against temporary supply shocks evolving into persistent inflationary pressure.

Energy shock superimposed, inflation may remain elevated for long

The concerns over wage spillovers in the tech industry, combined with the energy price shock triggered by the Middle East situation, have made South Korea's inflation outlook even more severe.

In this semiannual assessment report, the Bank of Korea predicts that even if oil prices gradually retreat from recent highs, inflation may remain elevated for a considerable period of time.

The report forecasts that consumer price increases in the second half of this year will remain around 3%, with core inflation expected to stay in the upper 2% range, as energy-related costs continue to spread into a broader range of economic sectors.

Citing the historical experience of the Russia-Ukraine conflict, the central bank noted that energy shocks typically begin to affect industrial goods, non-energy goods and service prices about six months later, and even if oil prices level off, the transmission effect on inflation may continue for quite some time.

Faced with multiple inflationary pressures, the Bank of Korea’s policy stance has clearly turned more hawkish.

After the report was released, Shin Hyun Song said the central bank would closely monitor the inflation outlook and “act proactively until it is confident that inflation will stabilize at the target level.” He even more directly called last week for the central bank to raise interest rates “before it is too late,” a rare toughness in recent times.

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