Artificial intelligence may initially drive inflation before helping to reduce it, according to Federal Reserve System head Kevin Warsh. He shared this perspective during a speech in Congress, addressing lawmakers’ concerns about AI’s impact on the economy. He stated, “everything technology touches eventually becomes cheaper,” although the economy has not yet reached that point.
Andrew Sacre of Bloomberg Economics summarized the key takeaway from the speech: in the short term, AI may increase inflationary pressures, but over the long term, it is expected to act as a disinflationary factor. This discussion is pertinent not only for the Fed but also for other central banks, particularly the Bank of Korea, as South Korea is at the forefront of the global AI boom.
South Korea: How the AI Boom Affects the Economy
As one of the largest producers of memory chips essential for AI development, South Korea is experiencing uneven economic growth. On Thursday, the Bank of Korea raised interest rates for the first time since 2023 in an effort to combat inflation. Central bank head Shin Hyun Song identified the AI boom as a key driver of economic growth, noting that rising demand is gradually pushing prices higher in other sectors. He also mentioned that the weak exchange rate will continue to exert inflationary pressure for some time.
Economists Wei Yao and Michelle Lam of Societe Generale observed that record export growth in South Korea and Taiwan this year has had little effect on strengthening their currencies. They pointed out that a significant portion of foreign exchange earnings is reinvested abroad, while international investors are reducing their holdings of Korean stocks to avoid over-concentration in SK Hynix and Samsung Electronics. A similar trend is evident in Taiwan, where banks, insurance companies, and corporations are actively purchasing foreign assets.
According to Societe Generale economists, another factor is the so-called “narrow transmission” of the AI boom’s effects: profits are concentrated in high-tech, capital-intensive industries and have only a limited impact on other sectors and the labor market. This explains why the rapid growth of the AI industry has not yet led to a significant acceleration in consumer prices.
Analysts suggest that two conditions are essential for sustainable long-term economic growth and strengthening the national currency:
- proactive income redistribution through wages, household support, public services, and investments outside the technology sector;
- increasing domestic investment to ensure that a larger share of profits from semiconductor production remains in the country.
South Korea is already working to implement both strategies. Specifically, authorities plan to allocate revenue from the excess profit tax to a long-term development investment fund and invest in establishing a large chip production center in the southwest of the country. For the leadership of the Bank of Korea and Kevin Warsh, the pressing question remains how inflationary these investments will be and when the economy will start to benefit from enhanced productivity.
Source: Bloomberg
