Inflation Shock Momentum Index

The Inflation Shock Momentum (ISM) Index measures the proportion of inflation categories experiencing a sequence (at least 3 months) of either upward or downward price movements. Systematic increases are measured after removing any seasonal changes in prices, and accounting for re-pricing lags by using the resiudals from a fitted autoregressive (AR(1)) model. The ISM highlights the extent to which inflation is arising from category specific shocks versus generalised shocks, shocks are weighted by expenditure shares in CPI.

Through 2026 the ISM has been mostly negative, meaning that price decreases have outweighted price increases. In May 2026 the index jumped positive, driven most significantly by an increase in prices for new dwellings.

Contributions to the ISM

The most significant contributions to the ISM come from food, housing and transport. These categories are the most significant contributors because they combine:

• relatively high degrees of trade exposure;
• low price regulation; and
• represent a significant proportion of household expenditure.

Methodology

The methodology for calculating the Index follows the working paper Measuring Inflation Shock Momentum from the Federal Reserve Bank of San Francisco. The paper develops a simple, non-parametric filter that identifies sustained directional runs in innovations to monthly inflation.

Monthly inflation () in a category (i) at time (t), after removing seasonal price variation, is assumed to follow at AR(1) process:

In some categories this autoregressive model is very weakly identified. This is due to:

• the relative short available history for the monthly CPI;
• some categories, those with regulated prices (health, insurance, education and electricity) exhibit limited repricing windows each year.

In these categories with weak autocorrelation, the deseasonalised and demeaned prices changes are used. The data note below provides a comprehensive insight into monthly inflation and captured shocks for each category.

“Shock momentum” is identified from the residuals of this AR(1) process: a positive shock occurs in a category when at least k = 3 consecutive months have residuals greater than 0; a negative shock occurs when at least 3 are less than zero.

The positive and negative shock indices are constructed as the weighted sum of the sectors experiencing either positive or negative price shocks, from which the Inflation Shock Momentum (ISM) index is the difference:

Data note

The methodology has been adapted to Australia's relative short available history of monthly inflation. Monthly CPI was introduced properly only in 2026 with historical data across all categories commencing in 2024, for some categories data is avialable back to 2017. For those category for which a full price index history is not available a back cast process has been applied combining the available quarterly index data with recent monthly index behaviours.