A surge in the artificial intelligence (AI) chip industry and expectations of robust wage growth helped South Korean consumer sentiment rise for a third consecutive month in July, offsetting worries about high inflation and a recent stock market pullback.

Data from the Bank of Korea released on Tuesday showed the composite consumer sentiment index inched up to 106.8, its highest level since March. This reading is well above the neutral threshold of 100, indicating that households are broadly optimistic about the economic outlook.

While households reported a deterioration in their current living conditions due to persistent inflation and falling stock prices, the central bank said strong chip-related exports and investment, coupled with expectations of higher wages, supported overall sentiment.

The index measuring households' assessment of their current living standards dipped by 1 point from the previous month to 93, but their income expectations rose to 101. The outlook for the economy held steady at 92, which is above its long-term average, as the robust performance of the chip sector helped mitigate concerns stemming from heightened geopolitical tensions in the Middle East.

Sentiment in the housing market improved further, with expectations for apartment prices reaching their highest level since September 2021, driven by continued price increases in the capital region. One-year inflation expectations fell to 2.7% from 2.8%, as lower domestic fuel prices and a lessening of pressure from the previous won depreciation provided some relief.

These figures provide further evidence that households remain optimistic about the economic outlook, even as the cost of living continues to rise. South Korea's economy expanded by 0.6% in the second quarter, surpassing economists' forecasts, a performance largely attributed to AI-driven demand boosting chip production and exports.

The stronger-than-expected economic growth and higher consumer prices have reinforced expectations that the Bank of Korea may raise its policy rate again in October, with some economists even predicting a move at the next meeting on August 27th.