Saturday, July 4, 2015

Forecast of CPI for third quarter 2015

It has been a while since I made a forecast or reflected on the results of my prior forecasts. I have reviewed my most recent forecast for CPI for first quarter 2015 and it is far from perfect. For one thing, CPI fell by 1.6% from 117.9 in fourth quarter 2014 to 116.0 in first quarter 2015. This is in stark contrast with my projected increase of 0.6% to 118.6 in first quarter 2015. Looking across several simple forecasting methods (taking the historical average growth rate of CPI with rolling 1, 2, 3, 4, and 5 year windows), I have determined that each of these methods yielded similar results to my three-variable vector autoregression:

Actual: 116.0 (decrease of 1.6%)
1-year window: 118.4
2-year window: 118.1
3-year window: 118.1
4-year window: 118.4
5-year window: 118.5

Going forward one period to the next period for my simple extrapolating forecast methods, consider the following results:

Actual: 116.5 (increase of 0.4%)
1-year window: 115.9
2-year window: 115.9
3-year window: 116.0
4-year window: 116.4
5-year window: 116.4

The method with the lowest Mean Absolute Percentage Error between the uniform start period for the forecasts (2001 quarter 4) was the 5-year window. I still want to further refine my use of different forecasting methods, but I can at least keep this simple method in reserve, to look at alongside forecasts from a more advanced technique.

For third quarter of 2015, here are the forecasts:

1-year window: 115.4
2-year window: 115.4
3-year window: 116.5
4-year window: 116.7
5-year window: 116.9

I will try to keep up with the reports as they come out and compare my forecasts against them in the future.

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