By Jim Cline and Kate Kremer
In our last Newsletter, we report on the just-released June CPI numbers. As we indicated, while we had expected a sharp rise, the size of the rise caught us (and most economists) by surprise. The June national and Seattle indices exceeded 6% as did other regional CPI measures.
Last month we wrote:
June CPI Forecast. Previously, we had been expecting the June CPI, both All Cities and Seattle to be in the low to mid 3% range, based on the consensus economists’ forecasts. Based on these latest inflation developments, the All Cities index for June now appears likely to be over 4% and the Seattle index is likely to be over 3.5%.
While we were technically correct that the All Cities and Seattle indices were over 4% and 3.5% respectively, they were way over, something we hadn’t anticipated. We explained the importance of that prediction on negotiations:
If the June CPI data comes in as expected between 3.5-4.5, you would anticipate that settlement averages would be at least in that range.
But now that the actual CPI came in nearly 2 points over those predictions, does that mean that settlements will jump 2% higher. There are some reasons to think that won’t happen, especially if the early pushback by employers on this issue is considered.
Employers are arguing and will continue to argue, until the data shows otherwise, that the June numbers are a short-term “blip” in the data. They also argue that last year’s June CPI was unusually low which is true — last year’s June CPI reports were around 1%. And most 2021 settlements vastly exceeded that number. So, employers will not argue the equities of not keeping pace with this year’s CPI when they exceeded the CPI last year.
On the other hand, it seems much less likely that unions will only settle for 4% when inflation is running half again over that pace. A closely related factor that will need to be watched closely will be industry and comparable “settlement trends” — how other contracts settle for 2022 (and beyond). But now it is simply far too early to predict those settlement trends. Due to the pandemic and other factors, very few contracts are actually settled into 2022. So, we don’t have a lot of concrete data points to infer a future “trend” from. And we don’t think any clear picture of trends is likely to materialize until late this Fall.
The other point to consider here, and another “known unknown” is what the inflation trends will be going into next year, and beyond. Last month we wrote:
The consensus of economists was that inflation would subside in the second half of 2021, likely dropping below 3%. Now, however, there are a growing number of economists predicting that even if inflation subsides somewhat, it will continue at a higher rate than previously expected, possibly in the 3-4% range, or even more. It’s important to understand that some portion of this bump is artificial — this is a bounce back from a lower base 12 months ago in which the CPI number was relatively suppressed. This fact supports predictions that the CPI will subside later in the year. On the other hand, a growing number of economists are concerned that the CPI will not subside and that the current rising costs could start an upward spiral of rising prices.
Since that June blog predicting a slowdown in inflation later in the year, a growing number of economists have started to predict that inflation may not slow down, or that it may slow down a bit but not all the way to the earlier expected 2-3% range.
The lack of clear prediction on the trajectory of inflation is an enormously complicating factor for current negotiations. If inflation could safely be expected to be under 3% by next June, one possible path to settlement is to spread the inflation catch up over two years, this year and next. For example, if inflation were to fall below 3%, a 2021-22 two-year agreement of increases in the range of 4-4.5% each year may be more appealing (at least for groups who are already “at market” and not lagging behind their comparables.
There are some other significant economic and fiscal developments beyond CPI that also need consideration. Not the least of these is that every city and county in the state is in the process of receiving a virtual windfall in the form of American Rescue Funds. We’ll cover those funds and other economic developments and evaluate how they impact your bargaining goals and tactics.
For current and historic CPI data, follow the path to the Cline and Associates Premium Website. For those not having a Website subscription, find more information here about what’s included and how to subscribe.
