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QBUS2820 Assignment 2 (30 marks)
1 Background and Task
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of
consumer goods and services, such as transportation, food, and medical care. It is calculated
by taking price changes for each item in a predetermined basket of goods and averaging them.
Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is
one of the most frequently used measures of inflation and deflation 1.
In this project, your task is to develop a predictive model to forecast CPI of a particular sector
given its historical quarterly values. The CPI data set CPI_train.csv contains the quarterly CPI
data from Jan 1990 to Dec 2019 (120 data points). This data set is based on a real CPI dataset with
some added noise for the de-identification purposes. The test data set CPI_test.csv (not provided)
has the same structure as the training data, and contains the quarterly CPI data from Jan 2020 to
Dec 2021 (8 data points).
Your task is to develop a predictive model, using CPI_train.csv, to forecast the quarterly CPI
measures from Jan 2020 to Dec 2021. Note that, this is a multiple-step-ahead forecast problem.
Test error
For the measure of forecast accuracy, please use mean squared error (MSE). The MSE, computed
on the test data, is defined as follows. Let ŷT+h|1:T be the h-step-ahead forecast of yT+h, based on
the training data y1:T, where yT+h is the h-th value in the test data CPI_test.csv. The test error is
computed as follows
test_error =
1
8
8
∑
h=1
(ŷT+h|1:T − yT+h)2,
where 8 is the number of observations in the test data.
2 Submission Instructions
1. You need to submit, via the link in the Canvas site, a Python file, named
SID_implementation.ipynb (SID is your student ID) that implements your data analysis
procedure and produces the test error. You might submit additional files that are needed for
your implementation, the names of these files must follow the same format SID_xxx.
2. In addition, please submit a csv file, named CPI_forecast.csv, that lists the 8 CPI forecast
values made by your final predictive model.