Discovery of Relationships Between Inflation Rate and Its Key Factors

Abstract

In year 2000 in the United States, jobs were plentiful and times were good. However, in year 2008 unemployment increased up to sky-high and lots of people suffered from the low income level. This was not a problem that only affected the people in USA but a problem that was felt throughout the entire world including Sri Lanka. Why are jobs plentiful in some years and scarce in others? What drives up prices over time? Now, it is time to discover solutions for these questions. Inflation is one of the major economic factors which influence the world economy as well as the behavioral patterns of the people. At present, the world communities pay much attention to inflation and put huge efforts to predict it accurately. What determines the inflation rate in macroeconomic view? In the long run, level of output is determined solely by supply-side considerations. Essentially, the output is determined by the productive capacity of the economy. The price level is determined by the level of demand relative to the output the economy can supply. In simple terms it can state that inflation will be affected by the demand-side factors, supply-side factors and external factors. The foundation of this research is used variables, which represent each of the main categories cause to inflation. It has used Gross Domestic Production (GDP) value, Money Supply Rate value as supply-side factors, Treasury bill Rate value to represent demand-side factors and foreign exchange rate value to represent external factors. Main objective of this research is to discover relationships between the inflation rate and it s identified key factors. Ultimately it s attempted to forecast future inflation rate using a new forecasting model which has implemented through the trends identified in research. It has used relevant statistics from year 1988 to 2008 which had been published by the Central Bank of Sri Lanka. In this research I was basically concerned about the Sri Lankan economy and I have used data relevant to the Sri Lankan economic factors. Therefore it is important to be concerned about the Sri Lankan economic condition with the aforementioned time horizon. The implementation of the research is mainly based on two phases. It uses data mining concepts to identify relationships between factors that contribute to the inflation rate and trains a neural network to predict the inflation rate. By using the results obtained from the analysis I have done a comparison about the applicability of neural network techniques and data mining models in statistical, time based data set. It is necessary to understand the importance of identifying patterns within the factors that contribute to the inflation rate and accurate prediction of inflation rate. That because Inflation can cause large number of adverse effects in the economy.. A country s monetary policies are mainly dependent on the inflation rate. Therefore forecasting of accurate value will be of high importance since the whole economy will depend on these decisions.