Inflation is a fall in the market value or purchasing power of money. Measurements of inflation are prepared and published by the Bureau of Labor Statistics of the Department of Labor, which measures average changes in prices of goods and services. The file titled CPI contains the monthly CPI and inflation rate for the period January 2000 through December 2005.
a. Construct a plot of this time series. Does it appear that a linear trend exists in the time series? Specify the exponential forecasting model that should be used to obtain next month’s forecast.
b. Assuming a single exponential smoothing model, calculate forecasts for each of the months in the time series. Use a smoothing constant of 0.15.
c. Calculate the MAD value for the forecasts you generated in part b.
d. Construct a single exponential smoothing forecast for January 2006. Use a smoothing constant of 0.15.