08-24-2022 Workshop Packet - Laserfiche WebLink

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The latest inflation report that is watched closely by the Federal Reserve showed “personal consumption expenditure” (PCE) inflation at 6.3 percent for May, lately far lower than the Consumer Price Index (CPI) of year-over-year inflation that’s commonly used for labor agreements and pension adjustments. The comparable CPI rate for the same period was 9 percent, and came in at 8.5 percent for July. That disparity illustrates the complexity of calibrating inflation at the state and local government level. It’s not surprising that parties with competing viewpoints will cherry-pick their data, as well as which time windows in the past or the future are most relevant in making compensation adjustments. Cost-of-living adjustments have been around for decades, and became commonplace in the “stagflationary” 1970s. Social Security began paying out COLAs in 1975 (the three-month average of urban wage earners’ CPI increases it uses is projected to invoke a 9-plus percent COLA increase for recipients in 2023). COLA indexing became popular in public-sector labor agreements around that time. Many public pension funds first tried to make unsystematic, ad hoc inflation adjustments, but that became a political and actuarial nightmare because those one-off, emotion-influenced adjustments were unfunded, which made a mess of the pensions’ financial structures. As a result, the Labor Department’s CPI became the common standard used in the public sector for COLA adjustments. The CPI weighs housing costs more heavily (at roughly one-third of the index) than the Commerce Department’s PCE, while placing a lower weighting on medical expenses that are often covered by public employer-subsidized health insurance. Those housing and medical-cost factors alone would seem to make the CPI more relevant to public workers’ pay rates, although some could argue that younger and older