Forecasting annual inflation rate of Ethiopia (2023-2027): autoregressive moving average model approach

This research addresses the significant implications of increased inflation volatility, highlighting the heightened uncertainty it brings to producers and consumers when anticipating future prices. Recognising the profound impact of inflation volatility on market dynamics, this study focuses on forecasting the annual inflation rate in Ethiopia from 2023 to 2027. Using annual inflation data from 1966 to 2022, obtained from worlddata.info, the researcher developed an autoregressive moving average (ARMA) model. A thorough examination of the model specification, stationarity, normality, and heteroscedasticity was done using the residual diagnostic checks, correlogram, and augmented Dickey-Fuller test. The unit root test revealed the stationary nature of the inflation rate at this level. The findings established that the ARMA (0, 4) model is appropriate and most suitable for predicting Ethiopia's inflation rate. Moreover, the results suggest a gradual decline in the inflation rate over the next five years.