By Jim Cline and Kate Kremer
The latest inflation reports show CPI on the rise. In the last two month reporting period the Seattle CPI (W) has jumped from 2.0% to 2.6% and the All-Cities (W) has doubled from 0.7% to 1.4%.
This is the first of an 11 part series addressing current economic conditions and wage settlement trends. In this Fall 2016 Wage Series we’ll bring you an update on CPI and economic developments, wage settlements, interest arbitration trends, statewide wage rankings for public safety classifications across the State, and an in-depth analysis of what factors appear to be impacting those rankings and settlements.
We will provide you a good overview of those trends but for the most detailed and complete look at wage rankings and settlements, you’ll want to explore our Premium Website . If you’re not currently a Premium Website subscriber you can review our services Cline and Casillas Premium Information Services and contact Karla Rava at Cline and Casillas and she’ll explain how you can become one: For current premium subscribers below are links to some of the additional available CPI reports:
Seattle & All Cities CPI-W 2 Year Report
Seattle & All Cities CPI-W 3 Year Report
Seattle & All Cities CPI-W 5 Year Report
Seattle & All Cities CPI-W 10 Year Report
Recent CPI Numbers
Here’s a graph that depicts the recent Seattle and All-Cities 12 month trend:
We generally review the bi-monthly CPI to track the figures according to the bi-monthly Seattle CPI release. However, the All Cities numbers are released monthly and it is notable that this index has risen substantially over the last three months. The All Cities CPI-W increase was 0.7% in August and jumped to 1.2% in September and then was up slightly to 1.4% in October. While still below the Seattle numbers this three month increase is being noted by some economists as indication that inflationary pressures are increasing in the U.S.
The June, August and October 2016 CPI numbers, the All Cities as well as the local indexes, held fairly steady from Jun-August 2016 with the All Cities-W index averaging 1.5% behind the Seattle increases. Then both indexes increased substantially between August and October. This was the second bump up in 2016. There are some economic indications that there may be continued CPI numbers over 2% over the next year. Since February 2014, the Seattle CPI-W has been significantly above the All Cities CPI-W.
While dropping from a high in April, the Seattle CPI-W held at 2% for the June report. Not shown on this table is the Seattle CPI-U for June 2016 at 1.8%. While under 2% this figure still stands strongly above the All Cities CPI-U June figure of 1%. Although we have found an increasing number of labor agreements utilizing a flat dollar increase, those that use the CPI figures to determine wage increases overwhelmingly rely on the June figure.
Here’s a graph showing other CPI indices commonly used for Washington public safety labor contract negotiations. The August numbers held steady or were up slightly from the June numbers with the exception of the West Coast CPI-W which went down by 0.1% from June to August 2016. The October numbers show ongoing improvement. The strongest increase for the monthly indexes came in September which is not shown on this table. But the September increases carried over to October with slight improvements in all the numbers. The West Coast figures show marked improvement possibly impacted by the over 3% San Francisco CPI.
2015 and 2016 CPI Trends
2015 and early 2016 predictions for US inflation near 3% over the next few years have proven inaccurate. White House Cuts Growth Forecast for 2015-2016 .
Gas and fuel prices were lower in 2016 than in 2015 and this along with flat food prices kept the CPI indexes low.
However, increasing energy costs and low unemployment may push inflation up over 2% for all the indexes.
GDP numbers for the 4th Quarter 2015 and 1st Quarter 2016 were below 1% as can be seen in the below Bureau of Economic Analysis chart. The All Cities-W figures fell below 0% in February 2015 and continued for the remainder of 2015, mirroring an economy that fell short of growth expectations. In 2016 the All Cities CPI-W was above 1% only twice in 2016: January and September.
The Seattle.index has been significantly stronger, as presented in our blog: Seattle CPI Maintains 2% Pace, National Index Lags Behind. Employment and income are higher than expected and Seattle home prices continue to rise. These pressures have kept the Seattle CPI above the All Cities index. Articles in our wage series will show that the wage settlements in Washington match the Seattle CPI-W, trending over 2% with 2016 average wage increases over 2%.
The Washington State Economic and Revenue Forecast explains the divergence between the Seattle and All Cities index:
Seattle area consumer price inflation is well above the national average. Over the last year, from October 2015 to October 2016, consumer prices in the Seattle area rose 2.4% compared to 1.6% for the U.S. city average. Core prices, which exclude food and energy, were up 2.6% in Seattle compared to 2.2% for the nation. The higher Seattle inflation is due to more rapid growth in shelter costs. During the year, shelter costs in Seattle rose 5.7% compared to 3.5% for the nation. With shelter excluded, Seattle inflation was the same as the U.S. city average at 0.7% over the year. Until recently, lower energy costs have been helping to keep the headline rate down both nationally and in the Seattle area but this effect is ending. Seattle energy costs rose over the year in October for only the second time in the past two years
Growth in the US economy appears weak in the first and second quarter of 2016 and there is an expectation that the economic recovery will continue at a slow pace. Expectations are for continued low gas prices without further decreases well into 2016. See ERFC September 2016 Publication. Diesel and Heating Oil are forecasted to rise. Energy prices have a substantial impact on the CPI numbers. The Washington State Economic and Revenue Forecast for September 2016 includes CPI annual projections that the All Cities Index will rise close to the Seattle index and that they would be 2.4 and 2.5% respectively for 2017, (page 115).
But all of these predictions were given prior to the election of Donald Trump as president. Forecasting CPI numbers is complicated and has proven unreliable in the volatile economy of the past decade. With Republicans in the White House and with a majority in the Senate and House there are expectations of substantial tax revision and deregulation. We are in a period of continued uncertainty as we move from the status quo. The policy proposals that would call for large infrastructure spending accompanied with possible tax decreases is expected to have a stimulus effect that is generally expected to be inflationary in nature. While in the past few years, national inflation have fallen short of the predicted 2% target, revised policies could create inflation rates generally excess of 2%.
Our office has committed the resources to not merely collect labor contracts but to input data from contracts into a database. This puts us in the unique position to analyze data over time. Our review of the Police Officer and Deputy Sheriff labor agreements shows that while 32% of contracts included a CPI-based formula for wage increases in 2009 this percentage has dropped to 22% in 2013 and 2014. An increasing number of labor contracts have exchanged the recently volatile CPI figures for a flat percentage increase. This figure has remained steady as 22% of settled Officer and Deputy 2016 labor agreements have a flat dollar wage increase. For further information regarding this trend see our 2015 blog.
As you assess your potential 2017 and 2018 wage offers you’ll want to factor in both the CPI predicted trends as well as the move of increasing numbers of public sector wage increases away from CPI based formulas. In the next article in this series we will discuss current settlement trends and later in this we’ll discuss these trends and other factors and what they mean for your contract negotiations outlook.
With unpredictability as the hallmark in both the economy generally and inflation rates specifically, you can anticipate that we will continue to update you on these inflation trends and how they might impact your contract negotiations options.
