International Journal of Economics, Commerce and Management Research Studies
Volume 2 , Issue 2 , February- 2019
MODELING INDIA’S CONSUMER PRICE INDEX FOR INDUSTRIAL WORKERS
B S Kambo, Dr.Kulwinder Kaur,
Former Deputy Director ( Statistics) Assistant Professor,Hindu College
Ministry of Labour & Employment University of Delhi110007,
Government of India, New Delhi Delhi, India
India
Abstract: -. The Box-Jenkins Autoregressive Integrated
Moving Average (ARIMA) model has been estimated
using monthly time series data on Consumer Price
Index for Industrial workers(CPIIW) for a period from
January 1990 to January 2019 and two years forecast of
CPIIW was made It has been found that the best fitted
model is ARIMA (0, 1, 1) X (0, 1, 1)12, Normalized
Bayesian Information Criteria (BIC) was 0.057,
stationary R2 = 0.44 and R2 = 0.98.The model was
further validated by Ljung-Box test (Q = 23.67 and
p>0.09) with no significant autocorrelation between
residuals at different lag times. The study shows that
CPIIW will remains more or less steady during the
winter season (October to March) and jumped
approximately 18 to 20 points during summer/rainy
season (April to September) for each of the year from
2019 to 2020. The dearness allowance/relief to the
Central Government Employee/ pensioners shall be of
the order of 12.8 percent in January 2019 which may
rise to 26.5 percent in July 2020.
Keywords— BOX and JENKINS; ARIMA; ACF;
PACF; CPIIW
I. INTRODUCTION
One of objective of monetary authorities like Reserve
Bank of India is to preserve stable price of goods and
serrvices by keeping a check on Inflation . Negative
consequences of inflation effects the purchasing power of
the people and their standards of living. High prices not
only make the life of fixed income earner unhappy but
also lead to uncertainty making domestic and foreign
investors hesitant to invest in the economy. It blurs the
mental picture of politician and economists as they try to
sort out the problem in the economy.Moreover,
exaggerated prices deteriorate the country’s terms of trade
by making domestic goods expensive on regional and
world markets.High gasoline or food price often
corresponding to political uproar in the country. In order
to make an effective monetary policy, Reserve Bank of
India (RBI) acquires information on the performance and
interrelationships of major macroeconomic indicators.
Conducting monetary policy is a not easy process since
it affects the economy with a lag. To meet these goals
some ability is needed to peep into the future. To carry
out these forecasts, most central banks take a number of
corretates into account. However,it is complex job,
particularly in developing countries,where economic
processes are highly unsteady and unpredictable.
However, there exist a number of empirical studies on
inflation factors in developing countries. These studies
IJECMRS10FEB15 www.ijecmrs.com
Gurinder Singh,
M.S (IT) Student,
American Public University
Charles Town WV25414, USA
show that inflation is a country-specific experience and its
predictors differ across countries.Therefore, economists
makes concerted efforts to develope reliable models that
could help understand the ongoing economic processes
and predict future developments. In this regard, this study
is important since it is aimed at forecasting CPIIW which
is a component of inflation in the Indian economy.
Consumer price index (CPI) is a measure that examines
the weighted average of price of a basket of consumer
goods and services, such as Food Beverage & Tobacco
(48.21%), Fuel & light (6.42%), Housing (15.29%),
Clothing & footwear (6.58%), Miscellaneous such as
Transportation, Medical Care Education, Recreation &
Amusement and Personal care & effects (23.32%) Das
et.al (2017) CPIIW most regularly used indicator to
identify period of inflation or deflation and also serve as
an indicator for the Central Government to declare
dearness allowance/relief twice a year in the month of
January and July for its employees/pensioners. This
paper therefore seeks to fit (a) an Autoregressive
Integrated Moving Average (ARIMA) model to the
monthly data on India’s Consumer Price Index for
industrial workers (CPI IW) from January, 1990 to
January 2019,(b) to provide two years forecasting of
CPIIW and (c) to find the percentage increase or decrease
of Dearness Allowance to the central government
employees due to price rise. Seasonal ARIMA model is
used because of its generality, it can handle many series
regardless of stationary or not, with seasonal or without
seasonal elements. The paper is planned as follows; (I)
Introduction, (II) Review of literature, (III) Methodology
& Modeling, (IV) Sources of data, (V) Empirical Results
the lastly (VI) Conclusions .
II REVIEW OF LITERATURE
S.O.Adams et.al (2014) have forecasted Nigeria’s
consumer price index using ARIMA MODEL. Salam
Shantikumar Singh et.al (2016) have used well-known
time series model, ARIMA (p, d, q) to analyze the time
series data of index of industrial production (IIP) in India
and made a forecasting IIP. Sahoo et.al (2014) have
confirmed that mineral export; industrial production and
economic growth are co-integrated, indicating an
existence of long run equilibrium relationships among
variables. They also suggest that there is a long run
causality relationship running from economic growth and
industrial production to the mineral export of India.
Mondal et.al (2014) have conducted a study on the
effectiveness of autoregressive integrated moving average
(ARIMA) model, on fifty six Indian stocks from different
sectors. They have accurately modeled for forecasting of
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 International Journal of Economics, Commerce and Management Research Studies
stock prices in National Stock Exchange of India by using
(ARIMA) model. Daniel et.al (2013) focuses on the
regression analysis and time series analysis of the
petroleum product sales in masters energy oil and gas.
From the regression analysis, it was observed that the
petroleum product sales are affected only by
environmental factors. However, the effect of
environmental factors is not significant after removing the
seasonal and trend variations in the data by using time
series analysis. It shows that time series analysis explain
the influence of seasonal and trend on the petroleum
product sales. In the study of Jha K, et.al. (2013) ARIMA
model has been used to model the growth pattern traffic
intensity and forecasting because it can minimize the
error resulting from the estimation with varying
parameters. From their finding it is suggested that the
traffic volume forecasting using ARIMA model is better
accuracy than any other traditional approaches such as
regression modeling.. Wojewwodzki.M (2010) examined
the short and long run causality between the growth rate
of household’s savings in the consolidated banking
system in Poland and Polish economic growth rate using
industrial production index as proxy variable.
III METHODOLOGY & MODELING
There are several methods dealing with time series
forecasting, the most relevant is Box-Jenkins (1976)
methodology which is used in this study. It is discussed in
several publications viz. Chatfild C (1996); Montgomery,
D.C. (1976); Pankratz, A (1983); Salas, J.D et.al (1980)
and Vandaele, W (1983)
Box-Jenkins ARIMA Model, Methodology:
In 1976, Box and Jenkins, give a methodology (Fig.
1) in time series analysis to find the best fit of time series
to past values in order to make future forecasts. The
methodology consists of four steps: 1) Model
identification. 2) Estimation of model parameters. 3)
Diagnostic checking for the identified model
appropriateness for modeling and 4) Application of the
model (i.e. forecasting). Autocorrelation Function (ACF)
and the Partial Autocorrelation Function (PACF) are two
important diagnostic tools used with time series analysis
and forecasting. These functions calculate the statistical
relationships between observations in a single data series
with lag. The plot of ACF helps to take a decision as to
many moving average terms are to be included in the
model. The PACF plot is used to decide how many auto
regressive terms are necessary to expose one or more of
the time lags where high correlations appear, seasonality
of the series, trend either in the mean level or in the
variance of the series Al-Ansari et.al (2006)
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Volume 2 , Issue 2 , February- 2019
We estimate ACF and PACF to identify provisional
model (step 1). They are used not only to guess the form
of the model, but also to obtain approximate estimates of
the parameters Box G.E.P (1976).Method of Maximum
likelihood that maximize the probability of observations
is used to estimate the parameters in the model (step 2)..
The next, is checking on the adequacy of the model for
the series (step 3). The assumption is that residual is a
white noise process and that the process is stationary and
independent. Model diagnostic checking is accomplished,
in this work, through careful analysis of the residual
series, the histogram of the residual, sample correlation
and a diagnosis test Ljung (1978). Assumptions of model
residuals are checked by Ljung-Box, Q-test. A model
with the less number of variables gives the best
forecasting results, i.e. the model with less number of AR
and/or MA terms. This is obtained by using Normalized
Bayesian Information Criterion (BIC) Etebong. P (2014).
The best model among the class of models considered is
one which has lowest BIC.
IV SOURCE OF DATA:
The data on Consumer price index for industrial workers
(CPIIW) from January 1990 to January 2019, used in this
research work, has been extracted from the Websites:
www.lboubureau.gov.in of Labour Bureau Shimla,
Ministry of Labour and Employment, Government of
India. It is the monthly data with base year 2001.The CPI
series with base 1981-82 was linked to series with base
2001 using linking factor 4.63.
V. EMPIRICAL RESULTS:
The data was analyzed using Statistical Package for
Social Science version18.1 (SPSS). We first cheeked
whether the time series (Monthly CPIIW) is stationary
and has seasonality. An examination of Fig 2 clearly
revealed that non stationary is inherent in data. Further,
the plots of ACF and PACF of the original CPI data (Fig.
3 and 4) also show that the CPIIW data is not stationary,
where both ACF and PACF have significant values at
different lags. Fuller Dickey et.al unit root test also
confirmed that original series is non stationary. Pumi Dua
et.al (2005) had also confirms in their paper that
consumer price index exhibit non-stationary seasonality.
In order to achieve stationary series,
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 International Journal of Economics, Commerce and Management Research Studies

Volume 2 , Issue 2 , February- 2019

Figure 6
Figure 2

Figure 7
From a close examination of the ACF and PACF (Fig 6
and Fig 7) of the first differenced series, we noticed that
Figure 3 the ACF show significant peak at low lag 1 implying
thereby that there may be at the most one non-seasonal
moving average (MA) terms i.e. q=0 or, 1, and the
corresponding PACF plot shows significant peak at low
lag (1) indicating that there may be at the most one non
seasonal autoregressive (AR) terms therefore p can takes
the value either 0 or 1.Inspection of patterns across lags
that are multiples of S(12) in the ACF shows that there is
only one significant peak at low lag i.e. at lag1 providing
a clue that there is only one seasonal MA term (i.e. Q
takes either 0 or 1 value) and the corresponding PACF
plot shows significant peak at low lag1 indicating that
there may be at the most one seasonal AR terms i.e. P
take either 0 or 1 value .This implies that the stochastic
process can generate the modeling for CPIIW with the
Figure 4 following ARIMA successful Models.

,the series is transformed by taking natural log, non ARIMA (1, 1, 0) X (1, 1, 0)12 ----------- 1
seasonal differences 1 and seasonal difference ARIMA (1, 1, 0) X (0, 1, 1) 12 ------------- 2
(1,period12 ) and plot the transformed series ( figure 5) ARIMA (1, 1, 0) X (1, 1, 1) 12 ------------- 3
which clearly shows that the time series is stationary . ARIMA (0, 1, 1) X (1, 1, 0) 12 ----------- 4
ARIMA (0, 1, 1) X (0, 1, 1) 12 ------------- 5
ARIMA (0, 1, 1) X (1, 1, 1) 12 ------------- 6
ARIMA (1, 1, 1) X (1, 1, 0) 12 ----------- 7
ARIMA (1, 1, 1) X (0, 1, 1) 12 ------------- 8
ARIMA (1, 1, 1) X (1, 1, 1) 12 ------------- 9

The most important measure of goodness of fit of model

are statistics viz. R2, likelihood function (for maximum
likelihood estimation), standard error of estimate and the
Q statistic has been summaised inTable1. For a well-fitted
model, the Q statistic is expected to be statistically
insignificant. Another important criterion for checking the
Figure 5 adequacy of a fitted model is the Normalized Bayesian
Information Criteria (BIC). When considering several
ARIMA models we choose the one with the lowest BIC.
Based on these four important statistics and BIC, ARIMA
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 International Journal of Economics, Commerce and Management Research Studies

Volume 2 , Issue 2 , February- 2019

equation 5 i.e. ARIMA (0, 1, 1) X (0, 1, 1) 12 seems to parameter estimates of this model are all significant
provide the best satisfactory fit to the first differenced (p<0.01).
CPIIW. This model has the highest likelihood function
and the smallest standard error of estimate among all the Table 2 Model Statistic ARIMA (0, 1, 1) X (0, 1, 1) 12
ARIMA structures considered (equation 1 to 9). Besides,
the Q statistics is statistically insignificant (p>0.097) Estimate SE t Sig.
suggesting that the residuals do not suffer from Difference 1
autocorrelation. MA Lag 1 -0.323 0.052 -6.379 0.000
Seasonal Difference 1
Table 1 Model Statistic ARIMA (0, 1, 1) X (0, 1, 1) 12
SMA Lag 0.931 .048 19.345 0.000
Model Statistics 12
Model Model Fit statistics Ljung-Box Q(18)
Number Note 1: † denote significant at the 1%
Note 2: MA represent non-seasonal moving average term
Statio- R RMSE MAPE MAE MaxAPE MaxAE Normalized Statistics DF Sig. of
2
Note 3: SMA represent seasonal moving average term
nary BIC Outliers
Again, the model is adequate in the sense that the plots of
R2 the residual ACF and PACF in figure 8 show a random
CPI- .440 .98 1.01 .495 .675 2.836 5.226 .057 23.670 16 .097 0 variation, thus, from the origin zero (0), the points below
Model and above are all uneven, hence the model fitted is
adequate.

Stationary R2 compares the stationary part of the model

to a simple mean model. From table 1 it has been
observed that he stationary R2 is found to be 0.44
(positive) which indicates that the model under
consideration is better than the baseline model (simple
mean model). The R2 is an estimate of the proportion of
the total variation in the series explained by the model.
Therefore the applied above model explain 98 % of
variation in data. RMSE (Root Mean Square Error) Figure 8 Autocorrelation & Partial Autocorrelation
measure of how much a dependent series varies from its Functions of the Residuals
model-predicted level, expressed in the same units as
the dependent series. Thus the variation of the original
CPIIW time series data from model-predicted level is
1.01 and it is considerably very good. On the other
hand, MAPE (Mean Absolute Percentage Error)
measure how much a dependent series varies from its
predicted- model level expressed in the independent
units therefore be used to compare series with different
units. In the present study, the time series data is of the
same units of measurement and hence the estimated
MAPE given in the table 1 has no role for testing
goodness of fit model. The estimated MAE (Mean
Absolute Error) of the model is 0.647 indicating that the
series varies from the model-predicted level reported in
Figure 9 Histogram of Noise Residual
the original series units.The largest forecasted error is
2.836 percent which is measured by MaxAPE
(Maximum Absolute Percentage Error). Therefore the
worst case scenario of forecasting the CPIIW by using
ARIMA model is less than 3 percent. Similarly, MaxAE
(Maximum Absolute Error) measures the worst case
scenario of forecasting the time series and was found to
be 5.226 The normalized BIC (Bayesian Information
Criterion) measures the overall fit of a model that
attempts to account for model complexity. It includes a
penalty for the number of parameters in the model and
the length of the series. Normalized BIC is 0.057.The
estimated coefficient of MA, SMA in the ARIMA (0, 1,
1) X (0, 1, 1) 12 model are shown in the table 2.The Figure 10

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 International Journal of Economics, Commerce and Management Research Studies

Volume 2 , Issue 2 , February- 2019

From Fig 9 the location parameter (mean) of the Noise On the basis of forecasted CPIIW, the Dearness allowances
residual is approximately zero (0.0005) with constant for central government employees as per 7th pay Commission
variance 0.00658.The normality test of the error (Noise recommended formula have been computed (Table 4 and Fig
Residual) conducted by drawing histogram of the 11).
residuals shown in figure 9 suggests that the error Table 4: Dearness Allowance/Relief (Percent)
distribution is approximately normal. Moreover, from the to Central Government Employees and
Q-Q plot in figure 10, it is confirmed that the error
distribution in the CPIIW time series follows normal
Pensioners
distribution since almost all points in the plot is closure to
the straight line except a few points. Therefore the Months January July
assumptions of the error component in the /Year
ARIMA(0,1,1)X(0,1,1)12 is fulfilled and thus this model 2019
can forecast the future trend of the CPI for industrial 12.8( 3 ) 17.0 (4.2)
workers from January 2019 to December 2020 is given in 2020
22.0 (5.0) 26.5 (4.5)
table 3:
Note: Figure within bracket denotes the percent hike
Table 3: Forecasting of Consumer Price Index for in Dearness allowances.
Industrial Workers of India

Month / Year 2019 2020

Forecast UCL LCL Fore-cast UCL LCL

JAN 302 307 298 331 357 307

FEB 308 314 303 331 358 305
MAR 309 318 301 332 360 305
APR 312 323 301 334 364 307
MAY 314 328 301 337 368 308
JUN 318 333 303 340 373 310
JUL 323 341 307 347 381 315
AUG 325 344 307 348 384 315
SEP 326 347 307 350 387 316
OCT 329 351 308 353 391 318 Figure 11
NOV 331 354 309 331 357 307
The dearness allowance/relief to the Central Government
DEC 329 354 306 331 358 305 Employee/ pensioners shall be of the order of 12.8
percent in January 2019 which may rise to 17.0 percent in
Note: UCL Upper 95 per Confidence limit, LCL Lower 95 July 2019 .In January 2020 DA will be 22.0 percent and
percent confidence limit in July 2020 it stand at 26.5 percent The percent hike in
It has been observed that CPI IW reaches to 302 in January Dearness allowance/ relief in January and July in each of
2019 then remained almost constant till March 2019. the years from 2019 to 2020 will be at the most 4 percent.
Thereafter it jumps by 18 point and reached to 329 in the
month of October 2019 and remains more or less stable till 6 CONCLUSIONS:
March 2020. It again gains 20 point and reaches the value of The consumer price index for industrial worker (CPI IW)
353 in the month of October 2020 and remains stable till has been studied using the Box-Jenkins (ARIMA) model
December 2020. It is found that CPIIW remained almost methodology. The monthly data of CPI for industrial
stable during the winter season (October to March) and workers for the period from January 1990 to January
jumped to approximately 18 to 20 points during 2019 was extracted from the website
summer/monsoon season (April to September). This may be (www.lboubureau.gov.in) of Labour Bureau Shimla,
due to the fact that price of Food, Beverages & Tabacoo Ministry of Labour and Employment, Government of
(48.47 Percent weight ) remains more or less stable during India and has been used to develop and test the model.
winter season where as during summer or monsoon season the The paper examined the appropriate model that fits the
prices of food related items shoot up at faster rate due to lack Consumer price index for industrial workers inflation rate
or excess of rainfall which often hits India’s food production. in Indian Economy between 1990 and 2018.It was
Trend in CPI-IW attracts the interest of Central Government discovered that the best fitted model is ARIMA (0, 1, 1)
Employees and Pensioners as their Dearness Allowance/Relief X (0, 1, 1) 12 Normalized Bayesian Information Criteria
given as compensation for inflation, is fixed based this index. (BIC) was 0.057, stationary R2 = 0.440 and R2 = 0.98.The

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 International Journal of Economics, Commerce and Management Research Studies
model was further validated by Ljung-Box test (Q =
23.67 and p>0.097) with no significant autocorrelation
between residuals at different lag times. The study
revealed that CPIIW will remains more or less stable
during the winter season (October to March) and jumped
approximately 18 to 20 points during summer/rainy
season ( April to September) for each of the year from
2019 to 2020. This may be due to the fact that price of
Food, Beverages & Tabacoo (48.47 Percent weight )
remains more or less stable during winter season where as
during summer or monsoon season the prices of food
related items shoot up at faster rate due to lack or excess
of rainfall which often hits India’s food production.
The dearness allowance/relieve to the Central
Government Employee/pensioners shall be of the order of
12.8 percent in January 2019 which may rise to 26.5
percent in July 2020.The forecasted CPIIW showed very
good agreement with the actual recorded data. This gave
an increasing confidence of the selected ARIMA models.
The study reveals that the Box-Jenkins (ARIMA) model
methodology could be used as an appropriate tool to
forecast the monthly CPIIW coming two years (January
2019 - December 2020). Since high gasoline or food price
often corresponding to political chaos. Therefore results
achieved for CPIIW forecasting will help the traders,
politicians, and analyst and policy makers for analyzing
price movements, market trends and determine the
indexing of dearness allowances/relief to the industrial
workers in the country. The forecasted numbers may also
help the finance departments of the central and state
governments to allocate funds for release of dearness
allowances/relief to their employees/ pensioners in their
coming two years annual budget.
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