Stratis Commentary on Current Expectations on Pay Trends in 2024
Inflationary Pressures are finally on a downward trend
The ESRI Quarterly Economic Commentary (Winter 2023) has observed that inflation has peaked and will moderate into 2024. This is largely due to the easing of supply-side pressures with energy prices stabilising and beginning to decline. The slowdown in the demand side of the economy across the globe will also have a downward impact on inflation. Furthermore, increases in retail interest rates due to a tightening of monetary policy has had adverse implications for euro area growth, however this reduced demand will lead to less inflationary pressures. Energy suppliers have recently started to pass on the reduction of wholesale prices to customers which should contribute to a reduction in overall inflation by the end of 2023. Food price inflation and housing costs are still the main drivers of the CPI and the HICP.
However, real wages in Q3, 2023 have started to increase again for the first time since the start of the current series of inflation increases at the end of 2021. The ESRI predict CPI inflation to be 6.4% and HICP to be 5.3% for 2023. This would represent a fall of 1.4% and 4.1% on 2022, respectively. The projection is for a further easing of these rates to CPI 2.9% and to HICP of 2.4% in 2024. The HICP inflation in the euro area is also on a downward trend and is approaching the 2% target.
Similarly, the latest Central Bank Quarterly Bulletin (September 2023) is predicting the path back to lower rates of inflation is likely to be gradual and uneven. The Bank assesses that inflation (HICP), is forecast to average 5.4% this year, and is expected to be 3.2% in 2024 and 2.3% in 2025. A more expansionary fiscal stance by the Irish Government than already announced for 2024 adds to the risk of higher inflation. The Bank still expects the unemployment rate to remain close to 4% out to 2025, tight labour market conditions will place upward pressure on wages, allowing for a catch up in real incomes following the decline in 2022.
Ibec in its Q4, 2023 Outlook also predicted that inflation by the end of 2023 will fall below 4%, and the annual average will be about 3.1% in 2024 with reductions being slower than might be expected due to Government imposed increases to labour costs and rises in retail interest rates.
Meanwhile, the EU Commission (November 2023) has predicted that inflation in Ireland having peaked at 8.1% in 2022 is projected to moderate gradually throughout next year from 5.3% for 2023 to 2.7% in 2024 and reach 2.1% in 2025.
The CSO estimated the Consumer Price Index (CPI) in November 2023 rose by 3.9% on average when compared with November 2022. This was down from 5.1% in the 12 months to October 2023. Meanwhile the annual increase in the EU Harmonised Index of Consumer Prices (HICP) was 2.5% for November down from 3.6% for October reflecting the fall in wholesale energy prices.
The Department of Finance (October 2023) projects an average inflation rate (HICP) of 5.3% for 2023; the corresponding figure for core inflation is 5.1% (the headline figure excluding energy and unprocessed food prices). As inflationary pressures ease, real household disposable income is set to recover, and this should support consumer spending growth. They project an inflation rate (HICP) of 2.9% for 2024 and 2.4% in 2025. The corresponding projected CPI measure is 6.3% in 2023, 2.9% in 2024 and 2.1% in 2025.
Inflation is finally easing and is expected to fall rapidly through 2024 but will continue to partly inform pay discussions in the year ahead.
Pay Trends have avoided a Generalised Pay/Inflation Spiral
Whilst we have seen some outlier settlements for company specific reasons, the general level of increases in 2023 has tended to span a wider range of c 3.0%-4.5.%, with some sector variations.
Reflective of this trend, the CIPD/IRN Private Sector Pay & Practices Survey 2023 showed that for unionised employments the planned basic pay increase is 3.1% for the next 12 months compared to 3.6% for the last 12 months. The full survey results indicated a planned rate of increase by respondents (unionised and non-union) of 3.6% in the next 12 months.
In the coming months there will also be an outcome on public sector pay talks which is likely to be on the generous side and may have some impact on pay trends more generally, including for 2024. The public sector is characterised by strict pay scales which are modified only after pay settlements are agreed, and the minimum wage is updated periodically. These rigidities mean there is a natural lag in nominal wages adjusting to prices.
There have been some recent indications by SIPTU that “existing agreements will be reviewed to ensure that standards of living for workers are preserved in the face of this economic crisis.” However, there is little evidence of this having occurred on any significant scale in 2022 or in 2023, unless the employer voluntarily agrees to do so.
The speed at which aggregate wages adjust depends on a number of factors, such as the persistence of inflation, company or sector-level wage negotiations and productivity, and household saving buffers, (which moved from 10% to 22% during the pandemic), among others. Whilst pay developments have not chased inflation trends, it remains unclear the extent to which workers expect future earnings growth to match price growth as opposed to a future earnings level which corresponds to the new price level.
In summary, it is our current assessment that:
Pay settlement levels should moderate to lower rates of increase in 2024 in light of the further expected easing of the inflation rate next year. However, the continuing effects of a tight labour market are likely to act as a drag effect on moderation and so we would not be surprised to still see a private sector 'run rate' of c 3.5-4.5% continuing for 2024 with sector and local variations trending downwards as the year progresses.
The risk remains that the year ahead could be a period of real earnings catch-up whilst the economy is operating at full employment, with ongoing tightness in the labour market combined with continued demand for labour placing upward pressure on wages.
If the business is considering the possibility of a longer agreement it should factor in the expected reduction in inflation in 2024/2025.
There is a focus by some employers on the use of lump sum or non-consolidated payments, which may be needed to reduce the consolidation effect of some base rate increases. This may include recourse to the higher limits of up to €1,000 available under the Small Benefits Exemption scheme.
Finally, in concluding pay deals, employers should also be mindful of the wider impact for others in their sector, region or nationally.
Brendan McGinty | Managing Partner
‘Strategic Employment Relations’
M: +353 (0) 87 2433038 T: +353 (0)1 5331104
Disclaimer: The information in this article is for general guidance only and does not constitute legal or specific case advice. The answers to specific situations will vary depending on the circumstances of each case. This is not a substitute for specific professional advice relevant to individual circumstances facing your business.