By Jim Cline and Kate Kremer
This is the final article in our 10 part economy and wage settlement series.
Even before Donald Trump was elected president indicators pointed to the return of both the local and the US CPI to a 2% + figure for the next few years, something previously discussed in this series. There are some economists that point to the bond market activity as indications of pending rising inflation. Others are not convinced that even the more dramatic actions of a new administration will have an immediate effect on inflation because there are some unchanging realities that are pushing inflation downward. Greg Ip, in his article Trumpflation: Not Now, Maybe Later, offers the following projections:
• Macroeconomic Advisers estimates a $4 trillion tax cut along the lines of Mr. Trump’s proposal would boost growth just 0.2 percentage point over the next three years.
• In the long run, rates are being held down by structural factors such as aging population and slow productivity growth.
• Goldman Sachs estimates that tariffs of 35% to 45% on Mexican and Chinese imports, as Mr. Trump has threatened, would add 0.2 percentage point to inflation while deporting 2.5 million illegal immigrants, by restricting the supply of labor, would add up to another 0.1 point.
The Fed announced a .25% rate increase in December and forecasted at least three more ¼ increases over the course of 2017. And the economy has had positive data pointing to firming inflation (three consecutive months of All Cities CPI increases) and progress in the labor market. For now, projections are of higher GDP, higher inflation and higher interest rates. But there will be revised analysis of the US economy as we move into 2017. And as mentioned in our earlier article in this wage series, there is a relative consensus among economists that uncertainty is high. Janet Yellen stated on November 17th, “Things could turn out very differently, we understand, and we will simply watch what decisions are made and factor them into our thinking going forward.” K. Davidson, Fed Rate Rise Could Come ‘Relatively Soon’ as Data Point to Stronger Economy, WSJ, Nov. 17, 2016. Cline and Casillas will continue to provide economic information as we report the bi-monthly CPI numbers.
What does all this mean for your contract negotiations? 2% has been accepted as a “normal” expected rate of inflation around which contracts were settled. Those of us who negotiated contracts preceding the Great Recession recall that 3% had once been the norm. If CPI is creeping up beyond 2% and edging towards 3%, settlements in the 2-2.5% range no longer appear as attractive as they have in recent years.
And that is even before you take into account the occupations such as police and dispatch where open positions exceed well qualified recruits. Law enforcement and dispatch contracts can be expected to continue to edge up in the next few years until there is some equilibrium established between candidates and positions. (Management negotiators who discount this problem on the grounds that it is a “statewide problem” need to pull their heads from the sand; agencies that choose to negotiate competitive compensation packages are going to be able to compete and those who do not can anticipate a growing number of unfilled vacancies.)
All this discussion presumes a continuation of economic growth. Should the economy collapse, of course, we’ll be facing a much different negotiations picture. We will do our best to continue to update you on economic developments. (To be fully informed continue to look for our newsletter and enroll in the Premium Website which provides far ranging information on negotiations and also legal issues.)
