The energy of the fuel does become the kinetic energy of the exhaust.
Let us ignore the fact that the rocket becomes lighter as it burns fuel, and that it will eventually run out of fuel. The rocket motor burns fuel at a constant rate. The exhaust comes out at a constant speed. From an inertial frame, in the absence of other forces, the exhaust will keep its speed forever, flying radially outward.
Each second the rocket runs, it burns some amount of fuel and produces some amount of exhaust. The increase in kinetic energy of the exhaust does not come from increasing the velocity of exhaust that has already left. It comes from giving kinetic energy to new exhaust.
From the rocket's frame, the rocket and fuel are at rest. As the rocket burns, the exhaust is ejected at a constant speed.
In an inertial frame, the rocket goes in circles at a constant speed. The fuel is ejected perpendicular to this circle at a constant speed.
For a rocket accelerating in a straight line, the rocket and fuel are still at rest. The exhaust is still ejected at the same constant speed.
From an inertial frame, the rocket and fuel are traveling together at the same speed. The exhaust is ejected at the same speed relative to the rocket. This speed changes with time.
The total change in kinetic energy is the same for the linear path. But some goes into accelerating the rocket and some goes into accelerating the fuel. This is most easily seen from an inertial frame.
Note that the fuel is moving forward and has kinetic energy. This becomes exhaust. When the rocket is moving slowly, the exhaust moves backward. If the rocket is moving fast enough, the exhaust moves forward slower than the rocket.
From the rocket's frame, the force and energy calculations are more complex. Accelerated frames always have a fictitious force. Fictitious is an unfortunate name that makes people think "imaginary." See Trying to gain better intuition about fictitious forces for more about fictitious forces.