Modeling and Forecasting Consumer Price Index (Case of Rwanda)

Abstract

Consumer price index is a measure of the average change over time in the price of consumer items, goods and services that households buy for day to day living. It is one of the main indicators of economic performance and also the key indicator of the results of the monetary policy of the country, because of its wide use as a measure of inflation. The main objective of this research was to model the dynamic of CPI and to forecast its future values in the short term. Therefore, to come up with a model and forecasts of CPI, Box and Jenkins methodology were used which consists of three main steps; Model Identification, Parameter Estimation and Diagnostic Checking. Therefore, ARIMA (4,1,6) was selected as a potential model which can fits well data, as well as to make also accurate forecast. Hence, the forecast was made for 12 months ahead of the year 2016, and the findings have shown that the CPI was likely to continue rising up with time.