2021 saw the Consumer Price Index (CPI) rise by 7%, the largest gain since 1982 (Bureau of Labor Statistics). While this is understandably concerning organizations and individuals alike, it is PNC’s view that this rise in inflation can be attributed to the ongoing economic recovery. To learn more about our views on inflation, please see our Inflation Vibration Paper. With that being said, it is never a bad idea to be prepared in the event this level of inflation persists. In this flash update, we discuss the impact inflation has on income streams and expenses, and ways nonprofits can potentially mitigate the effects.
Impact on Income Streams
- Grants: Grants are usually awarded as a fixed amount set to be paid out annually. Unless the grant has a cost-of-living adjustment included, the purchasing power of the grant will fall as inflation increases.
- Fees-for-Service: Organizations that rely on fees-for-service, as part of their budget, may find themselves short after accounting for inflation. Fees-for-service usually have a contract in place that does not include cost of living adjustments, meaning the money received for the service may not hold the same value as it did when the service was performed.
- Fundraising: Inflation hits fundraising in a few different ways: 1. Recurring gifts for the same amount from donors will have less purchasing power than the previous gifts. 2. Donor’s disposable income may be impacted by rising costs, meaning the donor will have less to give. 3. Increased costs of hosting a fundraising event may require an organization to increase the price of admission for events, which could lead to some donors being priced out.
- Membership Dues: Similar to the impact on fundraising events, organizations may have to increase their membership dues to ensure they can continue to cover a similar level of costs with the funds from members. This rise in costs, coupled with the negative effects of inflation on individuals’ wealth, may also price out a group of your members.
Impact on Expenses
- Cost of Labor: In Q4 of 2021, the average wage across all industries in the U.S. rose by 4.3%. This large increase was brought on by a combination of inflation and the Great Resignation. As inflation leads to rising prices, wages received by staff will no longer cover as many of their expenses as it previously did, meaning workers may feel their wage is no longer sufficient and ask for a raise. In addition to wanting a raise to cover increasing costs, employees will also be aware of the wage increases associated with the Great Resignation and may factor that into their raise request. Organizational leadership should be prepared for staff members to be requesting raises, or potentially be searching for a new job with a higher wage.
- Cost of Mission Materials: The impact on program-related expenses will differ significantly based on what your organization provides. Organizations that require frequent spending on supplies, such as food or building materials, will experience the effect of rising prices acutely.
Lessening the Impact of Inflation
- Adding Debt: Consider adding debt to your capital structure. While many organizations are skeptical of taking on debt, it can be far more favorable to the organization’s health to take out a loan to cover gaps in the budget than it is to take a large distribution from a long-term asset pool.
- Investments: If your organization has an investment pool, there are moves you can implement to lessen the impact of inflation on your portfolio. In an inflationary environment, owning income-producing assets such as REITs and high-quality dividend paying stocks can lessen the impact of market volatility on the value of your portfolio. To learn more about why these assets tend to outperform during periods of high inflation, please see our Inflation Vibration Paper. Speak with your investment advisor about how you can add these positions to your portfolio.
- Know What You Have: While your organization’s financial statement may show a large reserve pool, it is important to know what is truly available to use. Be sure both your board and your finance team are aware of which funds are restricted vs unrestricted. It would also be wise to examine recent budgets to identify any trends that have been affecting your margins in recent years.
- Ask Donors to Lift Restrictions: If you find your organization does not have enough unrestricted funds to maintain proper liquidity, consider reaching out to donors about lifting restrictions on their gift. Donors will appreciate your taking steps to ensure long-term success.