Four Things You Should Know About Inflation and the Higher Education Price Index

November 13, 2024 |
2 minute read
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Four Things You Should Know About Inflation and the Higher Education Price Index
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The Higher Education Price Index (HEPI), produced annually by Commonfund Institute, is an inflation measure designed specifically for educational institutions. It is comprised of eight key components of operational expenses, based on over 300 data points that have been tracked for more than 60 years.1

Given the current inflation environment, Commonfund is dedicated to ensuring HEPI is an accurate and valuable tool for practitioners at educational institutions seeking to project, model, and integrate a measure of inflation into their investment and budgeting processes.

Here are four things you should know about inflation and HEPI today:

1. Inflation is still an area of heightened concern.

It is evident inflation has subsided according to higher frequency measures; however, institutions are still burdened by the lagged impacts of inflation from prior years. A rolling 3-year Consumer Price Index (CPI) shows a near-tripling of average inflation, which institutions are going to grapple with for years to come. HEPI was stable at 2.0 to 3.0 percent annually for 15 years leading into a gap-up to 5.2 percent in 2022 and 4.0 percent in 2023. Aside from spending considerations, higher inflation has also led to a more restrictive interest rate environment that has changed the dynamic for institutional investment portfolios. According to the Commonfund Benchmarks Studies, there is evidence that in many cases institutions have had to spend more to meet commitments, putting increased pressure on the endowment assets and fundraising.

CHT1-CPI-Shows-Inflation

2. Using the right inflation measure matters.

Inflation is a metric often used in endowment management to establish spending policy, which is a key component of determining long-term return objectives, asset allocation, and risk management.

Setting return targets utilizing inflation projections enhances an institution's ability to maintain intergenerational equity by targeting real, inflation-adjusted returns. In the graph below, data from Commonfund’s 2023 Benchmarks Studies show that nearly half of higher education institutions and more than half of private foundations use inflation as an input in their return objective methodology. The anticipated higher for longer inflation environment may put pressure on institutions to re-assess their return targets, spending policy, and asset allocation to ensure sustainable endowment stewardship into the future. But to optimize decision making, using the right inflation measure is critical.

CHT3-Percent-of-Insitutions2

3. Which measure or measures of inflation should be considered?

CPI is the most frequently used and highly observable measure of inflation, especially by policymakers, financial markets, and businesses. But your institution may also consider HEPI, which is an inflation measure designed specifically for educational institutions and is modeled based on major cost components such as faculty salaries and benefits, administration, materials, utilities and more. There are components of both measures that may be beneficial to consider, for example HEPI considers faculty but also clerical, administrative, and service wages, whereas CPI data can provide more granular data on transportation, food, and housing.

CHT2-Main-Components-of-CPI-and-HEPI

 

4. We are assessing HEPI and need your help.

We are actively undergoing a process of assessing the HEPI methodology and need your help to make sure any potential enhancements are rooted in robust data and meet the needs of your institution. We think of HEPI as a public good that allows investment and budgeting professionals to have the most relevant information to guide decision making. The more data we have, the better-off all will be. Please take our brief 5-10 minute HEPI survey to help us ensure the methodology is as accurate as possible given recent changes to inflation levels. (Hint: the main question is about your key budget components!)

 

 

  1. For more on HEPI’s origins, see Higher Education Price Index (HEPI) | Commonfund

 

Amanda Novello

Author

Amanda Novello

Senior Policy and Research Analyst

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.