The consumer price index, or CPI, is a measurement tool used by various countries to indicate inflation or deflation over a period of time. Using a predetermined list of goods purchased by the average household, economists and government agencies can monitor prices paid to see if prices are going up or down. A CPI forecast is a projection of what might happen to future inflation levels, based on current and historical CPI data. Different techniques and variables are used to create a CPI forecast, depending on the country and the purpose of the forecast.
Most countries use standard goods to measure CPI. For example, the United States calculates CPI using major categories of items such as groceries, fuel, housing, apparel, and medical care. European countries use similar goods, including electricity and other energy expenses, but eliminating products such as tobacco and alcoholic beverages. Collectively, the representative goods used to calculate CPI are called a market basket or simply, the basket. Changes in the price of items in the basket are averaged over a 12-month period to provide an indication of the rate of inflation.
Regardless of the specific goods used to calculate CPI, in terms of creating a CPI forecast, the process is similar from country to country or region to region. Historical data is compiled and compared with current data to provide information necessary to spot trends in price fluctuations. Based on those trends, statisticians create an estimate of what price changes will likely occur over the next month, year, decade, or other period of time. Some types of CPI forecast models focus only on specific goods within the basket, as opposed to all of the representative items.
Methods and techniques used to project future CPI changes vary. The accuracy of various CPI forecast models is often an area of contention among economists and government agencies. Since a CPI forecast plays heavily into economic decisions and policies, businesses and governments need accurate projections. As such, a variety of methods may be used to create the most accurate CPI forecast possible, depending on the category of goods that might influence a particular decision.
Investment firms, for example, might create their own methods for developing a CPI forecast, covering those basket items that fall into the commodities market. Forecasts of this variety help investment advisers make recommendations on where customers should invest over the next month, quarter, or year. Alternatively, a government agency might use a CPI forecast covering all basket items, averaged over the last year, to gauge the following year's budgetary needs, public assistance benefits, or to allocate funding for economic growth initiatives.