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You are an investment analyst and you are trying to build a model explaining a recent uptick in inflation. You have identified three variables which

You are an investment analyst and you are trying to build a model explaining a recent uptick in inflation. You have identified three variables which influence inflation - unemployment, median salary change, and the change in the price level of imports. The regression equation you have constructed is as follows:

Where:

y - Inflation

x1 - Unemployment

x2 - Median salary change

x3 - Change in the price level of imports

While testing for the significance of your regression model, you have determined that all slopes are significantly different from zero, but x1 and x2 (unemployment and median salary change) are not independent, and there is a statistically significant relationship between these two variables.

Critically evaluate this problem and propose a solution.

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