The Specter of Inflation

A scary phenomenon is back just in time for Halloween! Inflation in the United States well above the Federal Reserve’s longstanding target of 2% per year began reappearing in the economic data at the start of 2021. After a peak of .9% in June (for an annualized rate in excess of 10%), the Consumer Price Index seems to be leveling out at a monthly .4% rate (4.8% annualized), much higher than anything we have seen in recent decades.

Most troubling is a distinct lack of consensus among economists about whether this is a short-term aberration caused by supply chain issues and or something more enduring and sinister. [A recent post by Fernando Martin in the On the Economy blog by the St. Louis Federal Reserve Bank gives a good and succinct analysis of the risks, while this item in Investopedia documents the risks and benefits.] Even without consensus on the long run, there seems to be a growing convergence on the likelihood that inflation will be higher and longer than initially believed (see this in the October 26, 2021, NY Times), even if we avoid the ruinous hyperinflation Twitter and Square CEO Jack Dorsey predicted yesterday.

All of this means that inflation must become one of the factors those plotting the future of schools consider when making strategy. Among the potential effects are rapid expense growth that puts pressure on current budgets and future tuition increases, devalued endowment holdings in real terms, and sagging confidence among consumers that undermines their willingness to commit to higher tuition. Strategists now have more variables to consider when placing and hedging “bets”.