Why Artificial Intelligence May Fuel Inflation Instead of Reducing It

Writing about stock markets and artificial intelligence-related shares has become a thankless task. Investor sentiment can shift dramatically from one day to the next.

These are not minor fluctuations but violent swings in sentiment, accompanied by sharp market moves in both directions. Keeping pace with such rapid changes is difficult even for traders, let alone journalists, who often see the market change course before an article is even published.

This is not simply a case of markets moving faster than they once did. The nature of trading itself has changed. Markets, particularly those tied to artificial intelligence, are gripped by profound uncertainty. No one knows how sentiment will ultimately shift. Will the current euphoria and exponential growth continue, or will the long-awaited correction finally arrive?

Yet this uncertainty is not the result of current market behavior – it is driving it. Investors are managing risk by taking profits on part of their holdings. It is not that the long-term outlook for artificial intelligence, semiconductor demand or memory chips has fundamentally changed. Rather, when volatility rises, it makes sense to sell into strength, reduce exposure and re-enter once the outlook becomes clearer.

The pace of trading is frenetic. After Samsung's preliminary earnings fell short of investors’ lofty expectations despite strong growth – prompting investors to hit the sell button en masse – attention quickly shifted to Friday's trading session. That was when SK Hynix, a major rival to both Samsung and Micron in the memory chip market, was due to make its debut on the US stock exchange.

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Record-Breaking IPOs and an Immediate Reality Check

This was not a traditional initial public offering, as SK Hynix shares have long traded in South Korea. Instead, its American Depositary Receipts (ADRs) began trading on Nasdaq. The listing gives US investors dollar-denominated exposure to the company’s shares.

The price was set at $149 per ADR, and the offering raised approximately $26.5bn, making it the largest US listing by a foreign company in history. SK Hynix surpassed even its Chinese rival Alibaba, whose ADRs also trade on US markets.

Investor demand was exceptionally strong. The ADRs rose 13% on their first day of trading and closed at around $168. The US listing appeared to confirm that investors’ appetite for companies linked to artificial intelligence remained undiminished.

The offering also gave the South Korean won a short-term boost, as the company plans to repatriate the $26.5bn in proceeds to fund further investment.

The enthusiasm did not last. On the very next trading day, SK Hynix shares listed in Seoul plunged 15.4%, marking the largest single-day decline in the company's history. Meanwhile, the US-listed ADRs traded at a premium of roughly 37% over the Korean-listed shares. In a single weekend, investor sentiment swung from enthusiasm over a record-breaking listing to doubts about the company's valuation.

Part of the sell-off reflected profit-taking. SK Hynix shares had gained more than 200% since the start of the year, leaving many investors with outsized positions in the South Korean chipmaker. In such circumstances, even a small sign of uncertainty can prompt investors to rebalance their portfolios quickly.

Investors were also concerned about second-quarter results. Markets had expected stronger growth in shipments of the latest HBM4 memory chips, but that has yet to materialize to the extent anticipated. In addition, SK Hynix has greater exposure to the HBM market than Samsung and therefore benefits less from rising prices for conventional DRAM memory.

The story of SK Hynix perfectly illustrates today's market. Within the space of a few days, investors witnessed a record-breaking US listing, double-digit gains on Nasdaq and then the largest single-day fall in the company's history on the Korean stock market.

Yet neither demand for artificial intelligence nor the long-term outlook for the memory chip market has fundamentally changed. What has changed is investors' willingness to continue holding high-risk stocks at elevated valuations. The only certainty is that sentiment can shift at any moment.

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Artificial Intelligence as a Hidden Driver of Inflation

One development, however, deserves more attention. While most investors are closely watching the share prices of SK Hynix, Micron and Nvidia in an attempt to assess the outlook of the AI sector, they should take their eyes off the charts for a moment and consider recent comments by New York Fed President John Williams.

As expected, Williams reiterated the Federal Reserve's dual mandate of price stability and full employment. He also emphasized that inflation remains the primary risk. Although higher oil prices are currently contributing to inflation, once they stabilize, inflation should fall back below the Fed's 2% target.

However, Williams then made a more significant point: inflation cannot be viewed solely through the lens of oil prices. He argued that a second major inflationary force could emerge from continued demand driven by the artificial intelligence boom, provided demand continues to outpace supply.

In other words, artificial intelligence is not only driving markets higher – it could also force the Federal Reserve to raise interest rates if the AI boom begins to generate inflation. The technology expected to curb inflation through higher productivity may instead end up fueling it.

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Geopolitical Tensions and the Start of Earnings Season

The sharp decline in SK Hynix shares on the domestic stock market suggests the entire sector could remain volatile this week. In addition to developments surrounding artificial intelligence, rising oil prices are another factor investors are watching closely.

The United States has carried out further strikes against targets in Iran, mainly near the Strait of Hormuz. Oil prices have edged higher again, although the increase has so far been relatively modest.

Commodity markets have remained comparatively calm because investors view the latest escalation more as an extension of negotiating tactics than as the start of a renewed war.

The location of the strikes reinforces that view. The waterway's security and freedom of navigation are expected to be central to any future agreement. By targeting the area, Washington is signaling that Iran alone cannot guarantee the safe passage of commercial shipping. At the same time, the decline in shipping traffic following the attacks should not be overlooked.

Geopolitical developments will not be the only force shaping markets this week. Earnings season is also about to begin in earnest, led as usual by the major US banks. Their results are likely to set the tone for the rest of the reporting season.