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The Case for Using the Higher Education Price Index® (HEPI) to Define Inflation for Colleges

June 24, 2019  | by George Suttles

Industry Knowledge

When calculating return targets for an endowment portfolio, a conventional piece of the equation is often the Consumer Price Index (CPI). CPI plus 5% is the common short-hand formula for institutions to achieve intergenerational equity, focusing on growing the endowment and maintaining purchasing power. With that said, although CPI +5% is used widely, we believe it does not best capture the expense structure for colleges and universities.

The Higher Education Price Index (HEPI) is an inflation index, calculated on a July 1 – June 30 fiscal year that matches that of most higher education institutions, that is designed specifically for higher education and may be a more accurate indicator for colleges and universities than CPI.

Compiled from data reported by governmental and industry sources, HEPI measures the average relative level in the prices of a fixed basket of goods and services purchased by colleges and universities each year through current fund educational and general expenditures, excluding research. HEPI includes eight components that cover most of the current operational costs of colleges and universities and is an essential tool enabling schools to determine increases in funding necessary to maintain purchasing power and investment. The CPI, on the other hand, measures goods and services that consumers buy day-to-day.

img - How Does Your Institution Define Inflation?

HEPI components are based on price data for 45 budget components that all schools can report, organized in eight component sub-indexes: faculty salaries; administrative salaries; clerical salaries; service employee salaries; fringe benefits; miscellaneous services; supplies & materials; and utilities.

HEPI is used primarily to project future budget increases required to preserve purchasing power. It is a measure of inflation for current operations, for budget hearings to justify the minimum funding requirements to maintain purchasing power, and a guideline for trends in other expense areas such as faculty salaries. For colleges and universities, how inflation is defined really matters to their ability to meet current and future spending needs as can be seen in the chart below comparing the growth of $1 dollar inflated by CPI versus HEPI.

img - How Inflation is Defined Really Matters

HEPI has been widely recognized as the only benchmark to effectively monitor changes in the purchasing power of higher educational institutions. Further, as many institutions have found HEPI to be a practical tool in the successful establishment of important policies, The Commonfund Institute will continue to produce and widely disseminate it within the higher education community.

To download the HEPI 2018 report and learn more about the methodology, click here.

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Authors

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George Suttles supports Commonfund’s educational, market research, and professional development activities as Director of Research of Commonfund Institute. He also serves as a member of the Commonfund Diversity and Inclusion Office. Prior to joining Commonfund, George was a Program Officer at the John A. Hartford Foundation, an independent, national private foundation focused on improving care for older adults. Before joining the foundation, he was a Vice President, Senior Philanthropic Relationship Manager at U.S. Trust/Bank of America. In this role he worked with private and institutional clients on issues related to best practices in strategic grantmaking. Throughout his career, George has supported the philanthropic activities of leading nonprofits with a focus on healthcare and related missions. He is also a member of numerous nonprofit boards, including Odyssey House, Drive Change, and the Support Center for Nonprofit Management. Currently, he is on the Adjunct Faculty at the New York University (NYU) School of Professional Studies. George received a B.A. from Wesleyan University, an M.A. in Philanthropic Studies from Indiana University Lilly Family School of Philanthropy (IUPUI) and an M.P.A.  from Baruch CUNY School of Public Affairs.
George Suttles
Director of Research
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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. 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. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. 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 Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or 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. Past performance is not indicative of future results. For more information please refer to Important Disclosures.