The most common use of the CPI is as an economic indicator to forecast inflation and evaluate the effectiveness of government policies. Following is the time series plot for the monthly CPI (not seasonally adjusted) from January 2007 to May 2013. The linear trend line is: CPI = 206 + 0.346 t, where t = 0, 1, . . . c76 to represent the months in the series.

a) What does the intercept 206 represent in this trend line? What does the slope represent?
b) Is this model appropriate for this series? Explain.
c) A regression model fit to the same data from 2009 on has the equation of 201.8 + 0.419t. Which model would you prefer to use to predict the CPI for June 2013? Explain.

Transcribed Image Text:

230 220 210 2007 2009 2011 2013 Year