DATA5000
Programming AI for Business Analytics
AI Causal Models and Large Language Model Forecasting Project
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Executive Summary
Over the last many months, the inflation rates, coupled with increased interest rates caused mainly by uncertainties in the global economy, have confronted Australia. We project, using our forecasting models, that an inflation rate of 4.5% should, over the next three months, stabilize due to the establishment of global energy prices and domestic fiscal policy. A set of key indicators was identified as relating to GDP growth and unemployment rate drivers of inflation (Tradingeconomics.com, 2024).
The influence of global inflation and geopolitical events greatly leads Citi Research in setting the economic outlook for Australia. Key implications of the findings are that strategic investments must be created in renewable energy and technological innovation to bring a precipitated sustainable growth in the economy with alleviated inflationary pressures. Also, this action will be further reinforced by strengthening trade relationships with the BRICS economies and providing avenues for buffering against negative external economic factors.
List of Figures
Figure 1 Direct casual effect with 95 % confidence interval 5
Figure 2 neuralprophet non causal model 5
Figure 3 Neural prophet model forecasting 5
Figure 4 Forecasting Results 6
Figure 5 Temporal Fusion Forecasting 6
Introduction to Geopolitical Economics
There have been some remarkable changes in the economic outlook for Australia, which includes the highest and unstable inflation rate, fluctuating GDP rate, and a shift in interest rates. Recent statistics depict that global inflation, particularly in the sources of energy markets, is still causing serious challenges to domestic prices. Localities are completely integrated with greater world powers such as the US, the European Union, and BRICS (Nach, and Ncwadi, 2024). It ties up several economic in positive as well as negative ways. In the context of geopolitical tensions, if there is one side that is China and that is the US, Australia seems to position itself to make full use of its ever-strong trade relationships, particularly with the BRICS countries. Indeed, against significant difficulties presented by the current energy crisis and supply chain disruptions, Australia's robust export sector allows partial mitigation of external shocks (Cochrane and Zaidan, 2024).
These changes in global trade dynamics require reviewing the economic policies and plans of Australia for further promotion of trade with developing economies and solving the domestic problems which could strengthen the general economic position of the country.
Methodology
The prediction of the inflation rate of Australia using a multifaceted approach and analysis of some of the important factors that could cause inflation in the country. First, the NeuralProphet model is used as a basic tool for the prediction of inflation without considering any exogenous casual drivers, using historical economic data (Lim et al., 2024). Then, LightGBM was used along with SHAP to find the most important casual drivers that might drive inflation, like interest rates and GDP growth, providing insight into these factors that may affect future economic conditions ((Das and Kumar Das, 2024).
Then, the Temporal Fusion Transformer fuses those time series data with causal factors to get a comprehensive forecast that captures the short-run fluctuations and long-run trends of inflation. This is for the fact that we also utilized EconML for causal inference to quantify various economic variables' Township effects on the inflation predictions (Lim et al., 2024). This approach lets us understand the holistic economic environment of Australia fully to facilitate informed decision-making with strong predictive analytics.
Results & Insights
The inflation will attain 4.5% by the end of the next quarter before a gradual decrease over the succeeding months, the NeuralProphet model projects its trend. This time-series graph plots the projected path of inflation.
Figure 1 Direct casual effect with 95 % confidence interval
Figure 2 neuralprophet non causal model
Figure 3 Neural prophet model forecasting
Although a variety of variables may affect this forecast, our prior casual analysis with LightGBM has identified the two most influential factors for driving inflation GDP growth and unemployment rate (Lim et al., 2024). Its relative importance, 0.43 and 0.32, respectively, underlines how relevant they are in shaping economic forecasts. In our TFF model, we incorporated causal drivers. The significant improvement in forecast performance. Comparing predictions with and without causal variables, we find that including these factors can provide a more realistic insight into the inflation dynamic-such as improved economic conditions due to favourable labour market trends.
Figure 5 Temporal Fusion forecasting
Key visuals include a time-series chart and SHAP value plots that emphasize the importance of these causes and model projection rates, further enhancing our analysis with clear graphical representations.
Figure 6 Global Effect Prediction
Recommendations
Some actionable recommendations which will enable Australia to achieve its goal of managing inflation and encouraging growth in its economy include the following. Monetary policy can be manipulated through interest rates to avoid inflating the economy without discouraging economic activities. Given the state of the local economy at present, interest rate increases will have to be cautiously pursued to avoid dampening economic growth.
Australia should also further its cooperation with the BRICS countries, especially in fields like renewable energy and technology. This will not only cushion the country from potential global economic shocks but also exploit the opportunities for growth presented by emerging economies.
Further resilience will come from diversifying investment into domestic sectors, less dependent on global supply chains. Developing more local innovations and improving manufacturing capacity will lower the level of vulnerability to fluctuations in the global economy. This multi-dimensional approach comprises strategic monetary policies, increased trade partnerships, and domestic investments that will go on to realize a much more stable and sustainable economic paradigm in light of emerging global challenges.
Conclusion
Australia is confronted by an erratic trend of monthly inflation rates amidst uncertainty in the prospects of the global economy. Our forecast indicates that inflation might stabilize around 4.5% for the coming months on account of some driving variables like GDP growth and unemployment rates. Given these challenges, strategic monetary policies should arise in Australia, along with an increase in trade ties with BRICS economies and developing domestic sectors with reduced reliance on global supply chains. These suggestions, if implemented, would make Australia move ahead with sound sustainable economic growth and with an altogether reasonable rate of inflation. It will reduce much of the shocks implored by an external economic factor.
References
Cochrane, L & Zaidan, E 2024 ‘Shifting global dynamics: an empirical analysis of BRICS?+?expansion and its economic, trade, and military implications in the context of the G7’, Cogent Social Sciences, vol.10, no.1. doi.10.1080/23311886.2024.2333422.
Lim, B, Arik, Sercan O, Loeff, N. & Pfister, T, 2024. Temporal Fusion Transformers for Interpretable Multi-horizon Time Series Forecasting. arXiv.org. <https://arxiv.org/abs/1912.09363>
Nach, M & Ncwadi, R. (2024) ‘BRICS economic integration: Prospects and challenges’, South African Journal of International Affairs, vol.31, no.2, pp. 151–166. Doi. 10.1080/10220461.2024.2380676
Pijush Kanti Das & Prabir Kumar Das, (2024) ‘Forecasting and Analyzing Predictors of Inflation Rate: Using Machine Learning Approach’, Journal of Quantitative Economics. <https://doi.org/10.1007/s40953-024-00384-z>.
Tradingeconomics.com. 2024. Australia Inflation Rate. https://tradingeconomics.com/australia/inflation-cpi.
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