Forecasting

CPI
Xiang Huang , Wenjie Huang,
Teng
Wang , Hong Wang Benjamin Wright ,
Naiwen Chang, Jake Stamper

Definition
The consumer price index (CPI) measures
the cost of a standard basket of goods and
services commonly purchased by
households.
The index is published monthly by the
Bureau of Labor Statistics, and is used to
calculate the rate of inflation.

CPI index since 1983

CPI
240

Trace

220
200
180
160
140

24

Histogram

Series: CPI
Sample 1 340
Observations 340

20
16

120
12

100
80
50

100

150

200

250

300

8
4
0
100 110 120 130 140 150 160 170 180 190 200 210 220

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

158.9701
159.7500
224.4330
97.90000
36.57263
0.045908
1.864855

Jarque-Bera
Probability

18.37395
0.000102

Time Trend Forecast

Correlogram of CPI
Evidence of an
evolutionary series.
Use first-differencing
to pre-whiten and
obtain a stationary
series.

First-Difference of CPI
Trace
DCPI
3
2
1

Histogram

140

Series: DCPI
Sample 1 340
Observations 339

120
100

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

0
80

-1

60

-2

40

-3

20

Jarque-Bera 7138.795
Probability
0.000000

-4
50

100

150

200

250

300

0.373254
0.400000
2.700000
-3.928000
0.481705
-2.153560
25.06468

-4

-3

-2

-1

Correlogram of DCPI
Add
AR(1),AR(2),and
MA(12)

Unit Root of
DCPI
Augmented
Dickey-Fuller is
sufficiently
negative, rejecting
the presence of a
unit root.

ARIMA MODEL OF
DCPI
Tan
Cycle
theta=0.36/0.28=1.
Calculation:
2857
Theta=52.125
degree
Cycle=360/52.125=6
.9 years

ARIMA MODEL OF DCPI

Actual, Fitted and Residuals Graph
4
2
3
2

140

Histogram of Residuals
-2

Series: Residuals
Sample 4 340
Observations 337

120

1
0

-4

100

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

80

-1
-2

60

-3
50

100

150
Residual

200
Actual

250

300

40

Fitted

4.09e-05
-0.024544
2.109857
-2.862702
0.413371
-1.009439
14.32945

Jarque-Bera 1859.569
Probability 0.000000

20
0
-3

-2

-1

Correlogram of
Residuals

Breusch-Godfrey
Serial Correlation Test

Correlogram
of Square
Residuals

Add ARCH(1)

Correlogram

Add ARCH(1) and

GARCH(1)
in ARIMA
model

Drop AR(2)
Trace of the
standardized residuals
SDRESID
5
4
3
2
1
0
-1
-2
-3
-4
50

100

150

200

250

300

Correlogram of Standardized
Squared Residuals

Histogram of
Standardized Squared
Residuals
50

Series: SDRESID
Sample 1 340
Observations 338

40

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

30

20

10

0.044213
-0.031016
4.034350
-3.266398
1.000513
0.540747
4.851605

Jarque-Bera 64.75614
Probability 0.000000

0
-3

-2

-1

Exponential Smoothing
Forecast
Sample: 1 340
Included observations: 340
Method: Single Exponential
Original Series: CPI
Forecast Series: CPISM
Parameters:

Alpha

0.9990

Sum of Squared Residuals

1027.477

Root Mean Squared Error

1.738388

End of Period Levels:

Mean

223.442055779

Attempt to Create Distributed

Lag Model
No Granger Causality for Relevant
Variables
GDP

Unemployment Rate
Capacity Utilization
Industrial Production
Manufacturing Production
Commercial and Industrial
Loans
Consumer Loans
Consumer Sentiment
Money Supply (M2)
Federal Funds Rate

Without Granger
Causality, no
distributed lag
model could be
crated

True value CPI in April 2011: 224.43

Comparison of Different
Models
Method
Forecast of CPI for April
Time Trend
Forecast
ARIMA Model
GARCH(1,1)
MODEL
Exponential
Smoothing

2011
221.89
224.19
224.14
223.44

Actual Value of CPI in April 2011: 224.43

Forecast for May 2011

225.05

Monthly
Inflation Rate
(Annualized)
3.37%

224.22 to
225.88

-1.12% to
8.03%

CPI
Point Forecast
95 Percent
Confidence
Interval