The growing impact of inflation on not-for-profit organizations

While inflation is often associated with individuals, families and the increased cost of living on a year-over-year basis, the concept certainly has significant relevance to companies and not-for-profit (NFP) organizations.

In particular, NFPs need to be cognizant of inflation – where it is today and where it is likely heading in future years – and the primary areas of their organization that it impacts.

To begin, what is inflation exactly?

The Federal Reserve defines inflation as the measurement of the increase in prices of goods and services over time. Inflation is not measured by any particular good or service cost increase, but rather as a general increase in the overall price level of goods and services in the economy.

Changes to inflation are monitored by several price indexes, including the consumer price index (CPI). The CPI, which is released by the Department of Labor each month, measures the average change over a period of time of prices paid by consumers for a market basket of goods and services.

This topic is particularly relevant in 2022, as inflation is at a general 40-year high. Inflation levels peaked in May 2022 at a level not seen since December 1981. Inflation showed a small decrease since March and is currently at 8.6% for the 12 months ended May 2022. And as inflation rises, so too does the demand for not-for-profit goods and services – and so too does its potentially negative impact on organizations of all shapes and sizes.

Source: Current U.S. inflation rates: 2000-2022 | U.S. inflation calculator

With that in mind, what factors should NFPs consider in order to stay ahead during a period of high inflation? We have highlighted four key areas in the following section.

Inflation impact areas to consider

Revenues

Donations and pledges can be a significant source of revenue for many not-for-profit organizations. In a time of rising inflation, multiyear pledges of donations may not be as valuable as they have been previously, nor as attractive as one-time donations. Under SFAS 116 (ASC 958), an unconditional and legally enforceable pledge spanning over multiple years requires the NFP to account for the future cash flows and discount to present value using an appropriate discount rate. This discount rate should be adjusted for inflation and thus may result in less revenue recognized over time in a high inflation environment.

What can NFPs do? Organizations may need to go back to their current donors and request larger donations or higher pledges to help offset the discount factor. They may also want to consider expanding their donor pool to meet their immediate budgetary needs. Investing in a capital campaign or otherwise engaging a fundraising specialist may also be a solution, but it’s one that comes with additional cost.

Some not-for-profit organizations also rely on income earned from investments.

Depending on the type of investment, inflation can have a negative impact on current and future returns on investments. Investments in certain fixed income investments might be unfavorable to NFPs, since the income earned on these are low (lower than inflation rate) or fixed over time.

Stocks have fluctuated in periods of inflation, and so may become less predictable in this environment. As long as these for-profit companies can keep up with rising overall costs, there may not be much of a decline in their overall stock value. But this volatility could be detrimental to public and private foundations and those supporting organizations that rely on their investment earnings to make their required annual distributions. And it may adversely impact organizations that maintain endowment funds, as the returns could be smaller than what they saw during the peak of the pandemic, depending on their investment strategy.

The key for NFPs is to assess and possibly reconsider their investment portfolios – largely dependent on organizational goals and budget – to mitigate their risk and provide for an appropriate return on their investment, based on the needs of the NFP.

The investment information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought.