Multilayer Fe–Si–Cr alloy chip power inductors have the benefits of a smaller, thinner profile, lower DC resistance and higher rated current. During metal multilayer power inductor co-firing, Fe–Si–Cr alloy powders react with the inner electrode, silver, to form a large amount of hexagonal flaky AgCrO2. The p-type semiconductor, AgCrO2, will cause co-fired Fe–Si–Cr alloy multilayer chip power inductor insulation degradation, hence reducing the power conversion efficiency due to the increase in eddy current loss. The AgCrO2 forming mechanism is investigated in this study. It was observed that silver reacts with the Fe–Si–Cr thermal grown oxide layer, Cr2O3, and subsequently leads to the formation of Ag2CrO4 when the temperature is lower than 650 °C. The formed Ag2CrO4 with low melting temperature then volatilizes at higher temperatures through the pore channels to react with the volatilized Cr2O3 to form the AgCrO2. AgCrO2 will cause Fe–Si–Cr alloy multilayer chip inductor resistivity and breakdown voltage degradation.