Inflation's impact on school budgeting
It's budget season which means we are looking closely at costs for next year. If you are reeling from sticker shock after speaking to your vendor partners, take solace that you are not alone. According to the Pew Research Center, inflation is rising worldwide. The United States had the 8th highest inflation rate in the world in the third quarter of 2021. You may be wondering what inflation is and how it impacts our fiscal budget planning.
What is inflation?
Inflation is the year-over-year price change of a set basket of goods and services. It is a crucial metric that financial institutions and the Federal Reserve use to measure and describe the stability of an economy and the purchasing power of a currency unit. An inflation rate of around 2% indicates a healthy and stable economy. In contrast, falling prices may occur in a recession. And finally, a high inflation rate may indicate an imbalanced economy due to increasing costs for crucial products like oil and supply chain shortages. When inflation is high, you need more cash to buy the same goods and services from one year to the next as the purchasing power of the currency declines.
Financial agencies use different indicators to measure the inflation rate. While we have several measures of inflation, none provide a perfectly accurate representation of inflation at any given time. For example, the Bureau of Economic Analysis and the Federal Reserve use the Personal Consumption Expenditures (PCE) price index. At the same time, other agencies prefer the Consumer Price Index (CPI). Though they measure different economic components, the PCE and CPI are essential indicators for inflation.
Source: Bureau of Labor Statistics
To measure the nation's inflation rate, the Bureau of Economic Analysis conducts business surveys to estimate the average consumer's cost of living. Then, a basket of commonly purchased items is identified and tracked over time to evaluate the change in cost over a certain period. Finally, the PCE price index represents the percentage change in the basket's worth.
It is important to note that inflation is known as a lagging indicator, meaning that it describes events that have already occurred. While inflation is not used as a forecasting tool, it is fiscally shrewd to consider current events and how they may impact future inflation calculations. Additionally, inflation is an uneven measurement. Some sectors may experience high inflation while others may remain stagnant. This nuance should be considered when reviewing contracts for the next fiscal year since a high inflation rate will not impact every vendor.
Now that we have a more robust understanding of what inflation is and how it is measured, we can attempt to answer why it is increasing. The global economy relies on inflation to ensure that investors continue to put their capital into businesses. The role of central banks is to ensure that inflation remains stable. However, supply shocks due to COVID-19 shutdowns, natural disasters, and conflicts between nations can increase inflation despite the central bank's best efforts to deter it.
How does this impact us in school operations?
What does that mean for a school running a business? The things we used to buy now cost more. A school leader can use what we know about inflation to determine what areas of the school budget will be impacted and respond accordingly.
Here are some areas of your budget that will most likely increase at a faster rate in the upcoming year due to inflation:
Salaries
Food
Technology
Utilities
Facility maintenance
Professional services
There are, of course, different inflation rates to consider—food inflation rates and salary inflation rates, among others. As a result, certain budget line items may reflect no cost increase, whereas others should reflect the inflation rate. Additionally, when preparing a multi-year budget, specific assumptions for next year may be more granular than when budgeting for future years.
When altering budgets to accommodate inflation rates, carefully consider changes you cannot undo. For example, consider using short-term stipends rather than long-term salary increases where future increases will compound. Also, carefully assess recurring costs and whether they would be difficult to eliminate if it is necessary to balance the budget. In addition, look for creative solutions to hedge inflation. Finally, ensure your budget is flexible enough to adjust to economic shocks as they arise, including recession.
While the rising inflation rate may seem daunting, school leaders can combat its impact by being well informed and well prepared with a budget that can withstand future economic changes. Decreasing the impact of inflation is not solely done by reviewing expenditures. School leaders can also ward against budgetary shortfalls caused by inflation by strengthening funding sources like grants, endowments, and fundraising. And finally, working with financial experts like EdOps permits more time to focus on instructional leadership.
[This post contributed by Dionne Dabelow, School Finance Specialist.]