By Jim Cline

This morning’s monthly All Cities CPI report showed an inflation slowdown. But as it impacts labor negotiations, this development is dwarfed against the larger backdrop of economic and fiscal uncertainty.

Read more: Looming Economic Uncertainty Overshadows Today’s Report on Dip in National CPI Index

Today the BLS reported the March All Cities CPI at 2.4% for its “U” index and 2.2% for its “W” index. This is significantly down from the February numbers of 2.8% and 2.7%, respectively. The West indices showed similar declines.  “The Seattle numbers are reported bi-monthly with the April numbers to be released in mid-May.

This inflation drop exceeded economists’ expectations and would normally point to a reduction in the Fed discount rate, thereby allowing more economic growth. But this inflation news was generally discounted on a day where the stock market continued to fall on fear of the impact of pending tariffs. Economists also noted that the information seemed “stale” as it looked backwards to the end of March and doesn’t account for inflation pressures created by new and potential tariffs. Most tariff threats began after the beginning of April.

What does all this mean for pending and upcoming contract negotiations? There’s great uncertainty coming from different directions which makes any “crystal ball” cloudy at best. These are the three big factors we’re tracking now that would impact negotiations and all of them are very uncertain. These include the recession or economic slowdown risks, the inflation outlook, and the Washington State and local government budget outlook.

National Economy is Uncertain but Recession Risks Rising. The significant drop in the stock market, which continues this morning as I write this, is a concern on its own but more importantly, it’s based on markets anticipating a significant slowdown in the national economy.

At the start of the year, most economists placed the changes of a recession fairly low. The Wall Street Journal panel, reflecting a broad array of economists, placed the risk of a recession this year at 22%. They also predicted a continuation of the current historically low unemployment rates.

The announcement of widespread tariffs, since modified, sent the stock market spinning. It prompted an increase in the number of economists predicting that a recession by year’s end was either probable or highly possible. Day to day predictions varied following the rapidly evolving tariff news. Goldman Sacks, for example, had increased its recession prediction to 65% and then lowered it immediately to 45% upon the announcement of the partial tariff suspension.

The general state of the economy has significant implications for negotiations as it directly impacts local government revenues as well as broader labor market conditions. Even if no recession materializes, it seems most likely that that there will be some significant slowing of the economy.

Future CPI Direction is Uncertain. Despite today’s dip in inflation, most economists have said that any tariffs would increase inflation pressures, possibly adding one or two percent to the existing inflation rate. The Federal Reserve shares this view, leading them to maintain higher interest rates. Almost any current prediction is tied to how widespread new tariffs are. While the Trump Administration announced a 90-day suspension of most tariffs, the tariffs on China are moving forward. And there’s no certainty about what follows this temporary suspension.

Given the relationship between CPI data and year over year contract wage increases, the uncertainty about the direction of inflation complications any negotiations, especially for wages for 2026 and beyond. Many contracts are tied to a specific CPI formula and those that are not at the very least are built upon some assumption of the direction of the cost of living. Most bargaining teams seek to obtain a wage increase that is at least equal, if not greater than, the expected inflation. Where expectations are uncertain, negotiations are more challenging.

State and Local Governments Budgets are Uncertain. The State budget was already looking at painful cuts possibly to be offset by tax increases even before the tariff developments.  State government employees were facing furloughs. Any reduction in State spending is likely to have some impact on local governments whose budgets rely on a variety of State funds and grants.

City and county budgets were already facing significant challenges. For the past year or two, sales tax receipts have been fairly flat.

One positive possibility and one not without controversy, is pending legislation to increase property tax revenues. The State Senate and House have pending bills that would modify the existing 1% limit on property tax increases. The bill versions are different, and passage is uncertain but if adopted it would allow some increases above the current 1% cap to be tied to inflation and population growth. The House version retains a 3% limit while the Senate version is only limited by inflation and population growth.

The Tim Eyman initiative that created the existing 1% limit is a significant constraint on local government budgets, especially counties and fire districts that are heavily dependent on property tax revenues.  AWC is pressing for this lift and is supported by a broad coalition.

The status of this proposal likely won’t be known until the end of the legislative session. How much this lift will generate even if adopted will still remain uncertain. The legislation would not automatically increase property taxes but would allow local governments to lift their levy up to the maximum under whatever formula may be adopted.

Future developments. We will be keeping a close eye on these and other developments. A clearer picture, whether better or worse, seems likely to emerge in the next few months. We are planning a webcast to discuss these and other issues later this month.

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By Jim Cline

In Monday’s newsletter, we reported on the last All-Cities and Seattle CPI from February. That report showed that the Seattle indices, which had been running a percentage point or two over the All-Cities number are now coinciding with the All-Cities numbers and actually a fraction of a percent lower. This raises a recurring question on the differences between these indices and the pros and cons of each.

Read more: Why are the “Seattle” indices important and What’s up with them?

First, there needs to be an understating of the scope of where these numbers come from. The Seattle indices (“U” and “W”) do not cover simply costs within the City of Seattle but cover use sampling from all of King, Snohomish, and Pierce counties. BLS used to include adjacent urban Counties in the Seattle CMSA region like Kitsap and Thurston but eventually narrowed the geographic scope of this index.

Still, because those adjacent areas likely have their cost of living impacted more by Seattle Metro trends than national trends, it is common to use the Seatle numbers in negotiating contracts throughout Western Washington and even sometimes in Eastern Washington. Housing prices and other components of the cost of living throughout the State are much more likely to be influenced by what’s happening in the Seattle area than what is occurring in the Midwest or East Coast. And when you are using comparables that are located inside the Seattle Metro area, it’s likely that you are looking at the trends and expected trends for those contracts with a goal of keeping pace with those trends.

We have written on many occasions that there’s been a long term tendency of the Seattle indices to outpace the national indices. What’s been noteworthy recently is how much that has occurred. Two years ago, the All-Cities CPI was 2.3% while the Seattle number was 4.5%. While it is not uncommon for the Seattle numbers to outpace the national numbers by a fraction of a percent, that 2.3-point difference is remarkable and, as we expected, not likely to be long sustained. By last June the gap (had closed to a percentage (4.3% versus 3.3%).

Since that time the Seattle indices have continued to subside. As we explained in December, the large gap that had existed between the Seattle and national numbers is closing. And this month, as indicated above, the Seattle numbers are slightly lower. And as our report on the February numbers show, the gap has now disappeared.

That doesn’t mean that the Seattle indices, at least over time, won’t ride a slight amount above the national numbers. As long as the Seattle regional economy continues to perform strong the related inflation pressures, especially on housing costs, will continue. We have said repeatedly that if you were to tie your contract to a particular index, the Seattle index is a better bet in the long run than the All Cities, and we continue to make that recommendation for now.

By Jim Cline

In our last newsletter, we discussed the February CPI Report. In this article we discuss other economic developments, including state and local revenue forecasts.

Read more: Economic Factors Developments Complicate Bargaining Picture

Other than a slight rebound in past week, most of the recent economic news has not been good. The University of Michigan consumer sentiment survey also showed a dramatic drop in consumer confidence. The tariff wars concern economists and the broader stock market. The drop in consumer confidence is likely to impact consumer spending.

Last week Federal Reserve Chair Powell expressed a concern that tariffs could impact inflation and he was anticipating at least somewhat higher inflation in 2025. Those Fed projections will result in at least some delay in any interest rate reductions which will inhibit economic growth. Increasingly economists, including the Fed, are expressing some concern of the possibility of “stagflation” — the combination of inflation and a slower economy.

Over the past week the stock market has stabilized indicating that at least investors think that a recession may be avoided. But a number of economists have increased their projections on a possible 2025 recession from remote to much more possible.

A drop in consumer spending will have a potentially significant impact on Washington local government revenues. Statewide sales tax revenues for 2024 were flat relative to 2023, and 2023 revenues were up only modestly compared to 2022. On the other hand, those same revenues rose dramatically since 2018 and until recently cities and counties were in a seemingly strong fiscal position. The Cline and Associates premium website contains details sales tax revenue data, including breakouts by city and county.

Just last week the State released an updated revenue report that shows revenues lower than had previously been projected, largely because of the plateauing of sales tax revenues. The flat revenue picture has already impacted the State budget with State budget cuts anticipated. Damage from state budget cuts is ordinarily not limited only to state agencies. In many direct and indirect ways, local governments benefit from a strong state budget.

There are numerous Washington cities and counties that had already predicted possible budget cuts for 2026 and beyond budgets. Pending and uncertain are the request by cities and counties to raise the property tax levy restrictions and other revenue to allow more local government taxing capacity. The outcome of those efforts may not be clear until later in the spring.