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  #1  
Old 09-05-2010, 11:37 AM
tope tope is offline
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Default CPI index modeling

Does anyone know of an excel based model that can be used to project the CPI rate as well as the health care inflation rates...I have data dating back 36 months

Im trying to figure out if ARMA, Moving average or AR models will work

which is most robust?
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  #2  
Old 09-05-2010, 12:49 PM
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Why would you expect any of those models to be predictive?

What (exactly) do you mean by robust in this usage?

If you are going to bet money on this, can I be your counter-party? If not, can I at least short your stock before you do it?
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  #3  
Old 09-05-2010, 03:57 PM
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Good question

I don't think any model can be fully predictive, however we do make projections and measure the error term as well

By Robust, I mean one which has enough flexibility to include known variables in the current period about the immediate future
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Old 09-05-2010, 06:13 PM
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You might look at the implied forward prices you can get from the I-bond/Treasury spreads.
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Old 09-05-2010, 07:32 PM
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I have tracked and studied the CPI for various purposes for more than 30 years. I used to buy CPI projections from commercial forecasters who claimed enormous expertise. Eventually, I concluded (based on actual experience) that nobody has any expertise in this area, and even the most expensive, sophisticated forecasts aren't worth the paper they're printed on. Even short-term forecasts (like 90 days ahead) were essentially worthless.

If anyone could forecast the CPI with any credibility at all, they'd be the richest people on the planet.

Bruce
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Old 09-06-2010, 12:50 AM
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Originally Posted by bdschobel View Post
I have tracked and studied the CPI for various purposes for more than 30 years. I used to buy CPI projections from commercial forecasters who claimed enormous expertise. Eventually, I concluded (based on actual experience) that nobody has any expertise in this area, and even the most expensive, sophisticated forecasts aren't worth the paper they're printed on. Even short-term forecasts (like 90 days ahead) were essentially worthless.

If anyone could forecast the CPI with any credibility at all, they'd be the richest people on the planet.

Bruce
Indeed. There are way too many unknown variables involved. I would rather try to predict stocks over time, and that is a fool's errand unless you have inside information. I always loved building mathematical models, but some things simply are not practical to model.
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Old 09-06-2010, 10:09 AM
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Quote:
Originally Posted by bdschobel View Post
I have tracked and studied the CPI for various purposes for more than 30 years. I used to buy CPI projections from commercial forecasters who claimed enormous expertise. Eventually, I concluded (based on actual experience) that nobody has any expertise in this area, and even the most expensive, sophisticated forecasts aren't worth the paper they're printed on. Even short-term forecasts (like 90 days ahead) were essentially worthless.

If anyone could forecast the CPI with any credibility at all, they'd be the richest people on the planet.

Bruce
I remember making a CPI model some years back for a lifecycle mutual fund project.... the residuals were always very large compared to my model.

Interestingly, I couldn't find any significant correlations to stuff like stock indices... and even bond indices. Perhaps it was my data set, but people were surprised when I showed them that.
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Old 09-06-2010, 10:28 AM
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I went through exactly the same process probably 20 years before you did. I showed how bad all the professional forecasts were in relation to actual experience -- something that nobody had done, apparently. And I showed that relating CPI to any other time series was basically a waste of time because correlations were so poor over any reasonable time period.

Bruce
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Old 09-07-2010, 08:34 AM
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Maybe this problem needs some stochastic modeling, with a high variance term, rather than an attempt to get an answer that's a single number.
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Old 09-07-2010, 10:50 AM
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just assume its a martingale and E(X) = current value
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