Effects of Inflation on Independent Education: Prepare Now

The consensus appears to be that the Federal Reserve is intent on creating inflation as a means of staving off the threat of deflation. With all the talk of QE-2 (not the ocean liner, but rather, Quantitative Easing Part II), we as independent schools ought to be planning for the consequences.

What are those consequences?

• Higher prices for basic necessities (food, clothing, shelter) for families
• Basic necessities will cost schools more as well; dining plans will have to increase in price
• Utility costs will increase
• Increased prices (price appreciation) will bring pressure to bear on governing boards to increase faculty and staff salaries, as a means of keeping up with overall price appreciation for families
• Tuition increases will become a super-sensitive lever for schools. We will face internal and external price appreciation, yet be scrutinized by families who are price-sensitive (since many schools are at the price-saturation point already), and who will expect any tuition increase to be equal to or less than CPI.

The question becomes: "how do we plan for high inflation?"

First, we need to speak with those individuals who were heads of school during the inflation of the late '70s and early '80s. They lived through a significantly inflationary period. Almost any one of them will say that a 7% increase for faculty was unwelcome, as it was too low, relative to overall price appreciation. Their experience of having lived through it would be some source of comfort, perhaps, for school heads and boards.

If your school is already at the price-saturation point for your market, what is the board's plan to counter the effects of inflation that is being created on purpose by the Federal Reserve? For example, your school's endowment will suffer, since a high rate of inflation means that any return you might have will be forced into negative territory in actual dollars.

What to do in the meantime? (Figure 18-24 months for inflation to begin to take hold)

1. Endowment -- a) consider whether to decrease your annual draw to a minimal percentage; b) start raising more money for overall endowment; c) be sure that your portfolio includes weightings in areas that will weather inflation, such as commodities, precious metals, and perhaps foreign currencies.
2. Annual Budget -- construct a rubric that will allow your school's commitment to salaries to mimic a marathon: in other words, create estimates of what your competitors will be able to afford to pay faculty in the event of high inflation, over the long-run (say, five years). If your belief is that they will suffer enrollment declines in the event of high inflation, then it stands to reason that they will be unable to offer salary increases that keep pace with inflation. So, will your school be able to offer such increases, i.e., in keeping with CPI? If not, what metrics will you use to determine what your school will be able to afford? Think of it in terms of five years, so as to stretch out faculty salary dollars. Make sure that your faculty will come out ahead of the faculty at competitor schools, and you can use this data to provide some confidence to your faculty during inflationary times. It goes without saying that you should consider avoiding taking on any new debt, unless the opportunity of a lifetime is staring you in the face.
3. Classroom Materials -- prepare faculty with the  mindset of "making do" for a period of several years, cutting down on classroom materials expenses. In terms of textbooks, consider going to all electronic books, which are significantly cheaper.
4. Bricks and Mortar -- give serious consideration as to whether to expand your physical plant. In the event of high inflation, will your school be able to bear the increased costs of additional plant, let alone concomitant price increases in utilities, building materials, and such?
5. How We Do School -- is there a way that we can continue to provide high-quality education, yet by means of a different  model, one that allows us to contain and reduce costs? Where will the price-conscientious families go during a period of high inflation, if they're still willing to pay for an independent education? Do we touch the sacred cow of "18 max in a class"?

As a reminder, "inflation" means "an increase in the supply of money." We have inflation already, as evidenced by the M2 Chart below. The gray area shows how much the M2 increased during the 2008-09 recession (via quantitative easing):

What schools should be anticipating next is price appreciation, as a result of inflation. Did you notice that the M2 continues to increase in the "post-recessionary" period in which we find ourselves?

I'm concerned that schools are still dealing with the effects of the Great Recession, but are about to be whalloped by a significant increase in prices across the board. Families that are already price-sensitive may become even more so.