INTRODUCTION:
The value of the U.S. Dollar is ever changing, whether we as consumers know it or not. Since the
United States left the gold standard in 1932 the relative value of the dollar has been an indicator of political and economic stability and a key driver of consumer confidence. The decreasing value of the dollar (and therefore higher prices of consumer goods) is known as inflation and the rate at which it fluctuates is known as the inflation rate. While the U.S. government tries to control inflation via the Federal Reserve, its true value is dictated by the market and volatile. So, in addition to the Federal Reserve, what variables can we use to help predict the U.S. inflation rate? What implications will this have on businesses and consumers?
Literature Review:
Most current literature regarding the inflation rate is in reference to its relationship with exchange rates and the USD’s value relative to foreign currency. We can compare foreign inflation rates with that of the U.S. to assess stability of economies and possible financial investment strategies. Additionally, because the inflation rate weighs so heavily on foreign investment, it can have great implications for import and export.
PROCEDURE
Purpose:
What factors determine Inflation Rate?
The inflation rate has enormous consequences for the economy and investors. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates and encouraging investment in non-monetary capital projects.
Companies use inflation rates when planning finances, a key step in optimizing one’s investments, cost management and financial needs. Thus, predicting which factors cause the changes in inflation rate in order to forecast an appropriate future inflation rates is very useful for businesses.
Data Collection Procedures:
The most common measure of inflation rate is the monthly Consumer Price Index (CPI), which is based on a survey of tens of thousands of items Americans commonly purchase. Our project will also use other variables calculated by the Bureau of Labor Statistics in order to predict the inflation rate. These variables include calculated prices for several influential commodities including gasoline, rubber and plastic, and key statistics like the Consumer Price Index,

Unemployment Rate and Housing Rate. Additionally, we will use data on the average monthly expenditures on food and beverages, power and utilities, and household durables. The historical inflation rate is also listed for predictive purposes.
Inflation rate can be defined as the overall general upward price change of goods and services in an economy over time.
Consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households.
Steps of collecting data:
1 st : Do a general search on www.google.com
which the key word of inflation rate.
2 nd : Select the website of www.bls.gov
, which appears on the search lists, to search more in deep.
3 rd : Select the “Subject Areas” in the toolbar, choose the title of the data needed.
4 th
: Select data table and retrieve the information.
The Bureau of Labor Statistics collects this data on a monthly basis, providing us an appropriate amount of data. The data we will be using spans from January 1976 through February 2011.
Hypothesis:
We hypothesize that the inflation rate is dependent on several key economic factors. We also hypothesize that fluctuations in the inflation rate will be most strongly correlated with fluctuations in the CPI and Unemployment Rate, and fluctuations in several other variables will aid in the predictive ability of a statistical model.
Variable Control within the Purpose:
Fourteen variables from the Bureau of Labor Statistics and Federal Reserve Statistics will be used to predict the inflation rate in the model. Gasoline, Commodities, Power and related products, furniture and household durables, Miscellaneous, Rubber and plastic, Unemployment rate, housing, food and beverage and consumer price index (CPI) are all continuous independent variables that will be used to predict the inflation rate, which is the continuous dependent variable. We will also use exchange rates with the Euro and the Japanese Yen, as these are two other major financial markets. Finally, we will also use the U.S. Treasury Bill interest rate, and
Aaa Corporate interest rates.

1
Variable
Gasoline
Description
Average price per gallon of regular unleaded in USD as calculated by the Bureau of Labor Statistics
2 Commodities
3 Power and related products
4 Furniture and household durables
5 Miscellaneous
Average price as calculated by the Bureau of Labor Statistics in
USD
Average expenditures per household in USD as calculated by the Bureau of Labor Statistics
Average expenditures per household in USD as calculated by the Bureau of Labor Statistics
Expenditures as calculated by the Bureau of Labor Statistics
6 Rubber and plastic Average price as calculated by the Bureau and Labor Statistics in USD
7 Unemployment rate As calculated by the Bureau of Labor Statistics
8 Housing Rate As calculated by the Bureau of Labor Statistics
9 Food and beverages Average expenditures per household in USD as calculated by the Bureau of Labor Statistics
10 Consumer Price
Index
As calculated by the Bureau of Labor Statistics
11 Inflation Rate As Calculated by Bureau of Labor Statistics
12 Euro Exchange Rate As Calculated by Federal Reserve Statistics
13 Yen Exchange Rate As Calculated by Federal Reserve Statistics
14 U.S. T-bill Rate As calculated by Federal Reserve Statistics
15 Aaa Corporate interest Rate average
As Calculated by Federal Reserve Statistics
Data Interpretation Plan:
Since the dependent variable in the data is a continuous variable. The model will be run for a prediction purpose. We will be using multiple linear regression, COX regression, regression trees and neural networks. Finally the best model of the four will be chosen as the predictive model.
The choice will be made based on the standard error and predictive accuracy of each model.

Resources:
Chang, Kuang-Liang, and Chi-Wei He. "Does the Magnitude of the Effect of Inflation
Uncertainty on Output Growth Depend on the Level of Inflation?." Manchester School 78.2
(2010): 126-148. EconLit with Full Text . EBSCO. Web. 11 Apr. 2011.
Berentsen, Aleksander, Guido Menzio, and Randall Wright. "Inflation and Unemployment in the
Long Run." American Economic Review 101.1 (2011): 371-398. EconLit with Full Text . EBSCO.
Web. 11 Apr. 2011. http://www.federalreserve.gov/econresdata/releases/statisticsdata.htm
http://www.bls.gov/bls/inflation.htm
http://en.wikipedia.org/wiki/Inflation http://awberry2.blogspot.com/2011/03/how-to-use-inflation-rates.html
Ayman Hassan Abualajin
Tim Christian
Tina Nguyen