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.

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.

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.

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!)