By Jim Cline
In our past two newsletters, we’ve discussed the continuation of higher-than-expected inflation. Those articles identified the prediction by economists earlier this year for the mid-year 2023 national inflation to subside to 3.6% and our doubts that those predictions will materialize. We are now expecting the June CPI numbers to be closer to 5% nationally and higher for the Seattle indices.
As we’ve discussed before, there’s a fairly clear correlation between CPI trends and settlement trends. But it’s certainly not a one-to-one correspondence. We’ve had nearly 16% inflation over the past two years and reported statewide average settlements are far below that rate. A handful of settlements have kept pace with those numbers, many are a bit below those numbers, and some are far short of inflation.
We’ve also explained that one important factor in this lower than CPI settlement trend is that bargaining teams had seemingly underestimated inflation and settled too soon or without sufficient information about the direction of inflation and settlements. Given that many if not most economists missed the mark, it’s not unexpected that bargaining teams couldn’t anticipate fully what was coming.
There clearly area other factors at play as well, including limitations on employer resources but we’ve clearly been on record suggesting earlier settlements resulted in weaker settlements. Unfortunately, on a statewide basis, we continue to see that play out.
If the June CPI numbers fall between 5-6% as now seems very possible, will the existing 2024 settlements support arguments for 5 to 6% wage increases. So far it seems the answer may be “no.” While each set of negotiations turns on the particular trend among your comparables, we’ve seen a fairly widespread trend among the early 2024 settlements to be tied to a CPI formula often capped at 4% or sometimes 4.5%.
These numbers need to be put into perspective. In some cases, the agreement to those formulas may have seemed reasonable in the context of the agreement. You cannot judge a 2- or 3-year contract by a single year If earlier years involved aggressive wage increases and/or bumps in special pays and premiums, a compromise CPI formula for the later years might have seemed reasonable. And it’s always easier to try to judge settlements retrospectively. But in reality, offers have to be evaluated and decided upon based on what’s known at the time.
The purpose of our newsletters and associated training on this topic is to impart the best available information so that it can be applied to contract settlements. And that information not only what’s transpired in the past, but also the indicia of what might lie ahead in the future.
It seems to me that there’s another inherent problem to being tied to CPI going into 2024 and 2025, separate and apart from the “min/max” CPI formula issue. We recommend that clients consider that the CPI does slow down substantially — and we expect it will — that reduced inflation can have other unforeseen consequences on their contract. While the current high inflation environment is producing a majority of “below CPI” settlements, our expectation is that if the CPI does slow to its historic 2-3% range, we are not predicting that the statewide settlement trend will fall that low. Why? Because many of the recent tepid contract settlements will produce catch up proposals for “CPI plus” sized increases. So, getting tied to a CPI formula for the next couple of years may be another way for the employer to tie your wages down below your comparables.
As always, there’s a complicated set of factors that influence settlements; CPI reports are just one of the many important considerations. We’ll be discussing all these factors in much greater detail in our scheduled May training. (Contract negotiations are just one of several topics covered in depth in our two-day training program.) We are negotiating now under some very dynamic and fluid factors. We’ve often said that “knowledge is power” and we’re trying to present the best set of information that we can, so you are fully prepared to evaluate all options.
