Analysis and Forecasting of Consumer Price Index (CPI) in Kenya and South Africa using Holt Winter Model

Abstract

In this paper, Holt-Winters exponential smoothing approach is applied to model and forecast monthly CPI in Kenya and South Africa. Monthly data from January 2000 to December 2023 was obtained from Central Bank of Kenya and South Africa department of statistics. Time series decomposition showed that the trend component is the most dominant component in both countries. Kenya Holt-Winters estimated model has parameters 0.6756, 0.0077 and 1 for level smoothing, trend smoothing and seasonal smoothing respectively. On the other hand, South Africa estimated model has parameters 0.8917, 0.1057 and 1 for level smoothing, trend smoothing and seasonal smoothing respectively. The estimated models are efficient and effective as on average the fitted values are less than one percent off the observed values. The initial values for level smoothing, trend smoothing and seasonal smoothing are approximately equal in both countries. The estimated models are then used to predict CPI next twelve months. Over the forecast period, South Africa will experience a lower index as compared to Kenya. In both countries, it’s expected that monthly CPI will rise.