By: Jim Cline and Kate Kremer
In part one of our early 2021 Wage series, we reported on the latest CPI data. That was a look backward at the more recent data. In this article, we look forward to what you might expect for inflation over the near term. Given the goal of achieving a wage increase that at the very least doesn’t fall behind the cost of living, knowing where inflation may be heading is important.
For the past decade, the Federal Reserve bank has adopted a target of 2% national inflation. As we’ve discussed, sometimes they’ve fallen short of that target, especially when the general economy was underperforming. Last year, the Fed announced a major policy shift, indicating that it would no longer cap its inflation target at 2% but allow it to float above that rate:
The Committee reaffirms its judgment that inflation at the rate of 2 percent … is most consistent over the longer run with the Federal Reserve’s statutory mandate. …. In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.
Reinterpreting that “fed speak”: The Fed realizes that it can’t “control” or set the rate of inflation but can adopt monetary policies that directly influence it. As a matter of public policy, it has concluded that the economy would be better served by allowing a bit more economic growth, even if that drives the inflation rate above 2%.
Does that signal a return to the previous common CPI rate of 3%? Not likely. Most commentators interpreted this to mean that inflation would be allowed to rise, as the Fed itself indicates “moderately above” 2% but not likely allowed to drift all the way to 3%, at least without the Fed acting to counter that increase.
Notwithstanding the Federal Reserve policies and their determination to control the rate of inflation, experience indicates that the Fed is not omnipotent in steering inflation and external events can drive it higher. With the expected adoption of 1.9 Trillion (yes, that’s with a “T”) economic stimulus package, and the pandemic bounce back, most economists are expecting significant 2021 growth continuing into next year. Economists debate over whether that stimulus will spur a spike in inflation. Some say yes but some say that CPI will be tame and then some others have a view in between.
In this situation, we often focus on the consensus view that represents the outlook of the broader number of economists. The Wall Street Journal consensus does call for a short-term rise in CPI, jumping up to 2.8% by June before falling closer to 2% by the end of the year. Washington’s State’s Economic Forecast Council issues its report that shows several national inflation projections and they are in line with the Wall Street Journal — inflation rise close to 3% this year, before dropping closer to 2% for 2022 and beyond.
Forecasts for Seattle CPI are somehow higher. The Seattle Budget Office projects CPI to hit around 3.5% by June and to continue above 3% into next year. But the King County Economic Forecast Office projects a more modest inflation over the next two years, near 2.5%. As for those who apply one of the West Coast indices, we would anticipate that those may move in line with the Seattle index more than the national index.
All told, these various surveys suggest that there’s quite a bit of uncertainty as to the extent of possible inflation, both this year and beyond. A close review of the numbers does suggest that the long-term trend in which the Seattle CPI outpaces the National index will continue. We’ve previously discussed whether this trend will continue. It may no longer term but seems likely to do so over the next 2-3 years.
What does all this mean for your labor negotiations? Right now, there are a lot of variables at play, and CPI trends are just one of them. The condition of the national and regional economies, your employer’s budget situation, the trends in your comparables, and many other factors will drive your negotiations. In a future issue in this series, we’ll look at the range of these variables along with CPI trends and discuss how these factors collectively impact your bargaining plans and tactics. For now, it is safe to suggest that wage agreements in the vicinity of only 2% are unlikely to keep pace with near-term inflation.
