San Francisco Fed Develops Inflation Shock Index Signaling Persistent Price Pressures

San Francisco Federal Reserve economists Kevin Lansing and Adam Shapiro introduced the Inflation Shock Momentum Index (ISMI) on June 6 (local time), a tool tracking monthly shocks in the Personal Consumption Expenditures (PCE) price index that the Fed uses as its primary inflation benchmark. The economists stated that ISMI's near-zero fluctuations this year suggest inflation may remain at current elevated levels in the short and medium term. This assessment comes as May PCE inflation reached 4.1% year-over-year, marking the first time in three years that the rate exceeded 4%.

San Francisco Fed Economists Develop ISMI Methodology

The ISMI calculates the spending-weighted share of categories experiencing positive inflation momentum minus the spending-weighted share of categories experiencing negative momentum. Positive momentum is identified when a category shows three consecutive months of positive inflation shocks in the PCE price index, while negative momentum occurs after three consecutive months of negative shocks. A positive ISMI reading indicates broad-based upward inflation pressure, while a negative reading signals the opposite.

ISMI Fluctuates Near Zero in Current Year

The report stated that ISMI has been "fluctuating above and below zero" this year. The economists characterized this pattern as suggesting "inflation can maintain its current elevated level in the short and medium term." The May PCE price index rose 4.1% compared to the previous year, representing the first time the rate reached the 4% range in three years.

ISMI Tracked Pandemic-Era Inflation Surge to 40-Year High

The report explained that "ISMI showed significant changes during the pandemic period, falling in the early stages of the 2020 recession to reflect widespread negative demand shocks." The index then "rose sharply in 2021 and 2022 as PCE inflation soared to 7.24% in June 2022, the highest level in 40 years." The index's behavior during this period demonstrated its capacity to track broad inflationary and deflationary pressures across the economy.

FAQ

What is the Inflation Shock Momentum Index developed by the San Francisco Fed?

The ISMI is a tool created by San Francisco Federal Reserve economists Kevin Lansing and Adam Shapiro that tracks monthly shocks in the PCE price index. It measures the spending-weighted difference between categories showing three consecutive months of positive inflation shocks and those showing three consecutive months of negative shocks.

What does ISMI's current near-zero fluctuation indicate about inflation?

According to the June 6 report from the San Francisco Fed economists, ISMI's fluctuation above and below zero this year suggests that inflation may maintain its current elevated level in the short and medium term. This assessment was made in the context of May PCE inflation reaching 4.1% year-over-year.