Trying to use a linear regression model to forecast the CPI. I noticed that when I took a moving average of the residuals, though homoscedatisc and nonautocorrelated (i.e. they squiggle up&down with no uniform pattern), that they seemed to move in the same direction as the CPI. That is the moving average of the residuals and the depended variables correlated. What does this imply? Is this a case of omitted variable bias? Are my coefficients biased? What are some common prognoses for a such a problem?

  • $\begingroup$ Residuals of what kind of model? And were you using seasonally adjusted CPI? $\endgroup$
    – John
    Mar 29, 2013 at 17:03
  • $\begingroup$ Hi John, An arimax model. So AR terms and some structural/fundamental variables that I think drive the CPI. $\endgroup$
    – jessica
    Mar 29, 2013 at 17:14
  • $\begingroup$ of course it means your model is not good, average of residuals must be zero. can you please tell us at least what your model looks like? give us equation $\endgroup$
    – 4pie0
    Mar 29, 2013 at 18:18

1 Answer 1


The reason you're seeing the bias is because of the adjustment, commonly referred to the "fudge factor" that they government applies to basically all of their published statistics. This is almost always in the direction to make the numbers rosier, and therefore your error term likely will exhibit signs of positive serial correlation.


The standard test for first-order serially correlated errors is the Durbin-Watson test statistic. For higher-order testing of serial correlation you can use the Breush-Godfrey test.


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