By Jim Cline, Kate Kremer and Chris Casillas
In our last blog, we reported the significant drop in inflation reported in the October CPI report. With current CPI standing at 0.8% and 0.6% for the “All-Cities” and Seattle index, respectively, how might this sudden drop affect bargaining?
The October index is one of the least used indices used in contract negotiations. The more important CPI reports are those released over the summer, especially in June, because many contracts use the June and other Summer CPI reports to often peg their wages for the year following, either by means of a CPI formula, or as a guide to negotiating COLA adjustment. As we explained in June:
The June CPI report is the report we most closely watch and wait for because among all CPI reports, it is the most significant predictor of bargaining trends for the following year. While parties are using CPI formulas on a decreasing basis in recent negotiations, for public safety labor contracts that do utilize an index, the June numbers are the most frequently used. The June numbers are released just as summer negotiations get underway.
Still, this October report is not unimportant. When the June CPI numbers were released, showing the All-Cities index at 1.8% and the Seattle Index at 1.2%, we also wrote:
In the historic past, the CPI data has been highly predictive of settlement trends. In the more recent past, that has not been the case. Since the outset of the great recession, the CPI numbers have been unusually volatile and unpredictable, and local economic and fiscal conditions have more strongly influenced bargaining results.
We think that trend will continue into 2014. Despite the low Seattle CPI 1.2% number, we think other developments will be pushing settlements near or above 2%. Recent economic growth and rebounding sales tax revenues, something we’ll write about in our next economic blog article, cause us to be more optimistic about settlement trends than we have been since the 2008 start of the recession. Improving fiscal conditions not only increase available settlement funds, it will also likely lead to a resumption of hiring which, in turn, will start to press employers to offer and maintain a more competitive wage posture than they were required to do during recent hiring freeze periods.
Does the drop in the October CPI alter our previous predictions for 2014? Last month when it appeared that the inflation rate was starting to drop, we indicated:
[W]hile the low inflation reports likely suggest some downward pressure on settlement trends, other contra indicators suggest that settlements will, as we previously predicted, be “near or above 2%.” That’s our “best educated” guess right now and time will tell how well we hit our own target.
We continue to believe the last few months of reduced inflation will have some impact on 2014 bargaining and the latest report is another part of the “big picture.” Even if the parties historically relied upon the Summer month indices for bargaining, we have little doubt employers will cite these latest inflation reports to push for lower settlements.
We think the impact, though, will be marginal, not significant. Perhaps a 2014 settlement trend that might have been just north of 2% might be pushed just south of 2%. The other factors we identified above — improved economies improved budgets, tighter labor market for certain classifications — will be more impactful than a Fall dip in inflation.
A related reason for this is that as of late in many jurisdictions, there is a push by employers to go away from any type of CPI formula, even in the out years. The volatility of the CPI over the last 4-5 years coupled with the Great Recession have caused many employers to seek more stability in wage increases through flat percentage increases rather than an unknown CPI number. The net effect of this on bargaining is that the impact of the year-to-year CPI on the settlement trend is reduced from what it might have been in the previous era, where the majority of settlements were expressly tied to a CPI formula.
The greater impact of this lower inflation, if it is sustained would likely be in 2015 settlements. Between now and June, there are many months of inflation reports to be issued, the Fed and economists continue to predict an inflation rate near 2% into 2014, and if those predictions materialize, that will sustain a settlement trend closer to our earlier predictions. But if inflation were to unexpectedly remain below 1%, we would expect that this likely would push 2015 settlement trends significantly lower, closer to 1-1.5%.
