Modeling Consumer Price Index of Malaysia: Application of Exponential Smoothers

The Consumer Price Index (CPI) indicates whether the economy of a country is experiencing inflation, deflation, or stagflation. The variation of the CPI is used to assess price changes associated with the cost of living. Malaysia holds the 35^th highest Gross Domestic Product (GDP) in the world ranking and the 3^rd in Southeast Asian ranking in the year 2022. At present, the CPI of Malaysia shows an increasing trend. Therefore, the study was designed to predict the CPI of Malaysia. Monthly CPI data of Malaysia for the period of January 2012 to March 2022 were obtained from the International Monitory Fund (IMF) database. Double Exponential Smoothing (DES), and Holt’s Winter’s three parameter additive and multiplicative models were tested to forecast the CPI of Malaysia. Auto Correlation Function (ACF), Anderson Darling test, and Ljung-Box Q (LBQ) test were applied to test the model assumptions to validate the model. Both relative and absolute measurements of errors were applied to assess the forecasting ability of the model. Results of the study revealed that the DES is the most suitable model to forecast the CPI of Malaysia. According to the DES model, there is an increasing trend in the CPI of Malaysia.