Inflation has returned to the U.S. economy, and that is spelling trouble for fundraisers at America’s nonprofits. Inflation amounted to 7.9 percent over the past year — the fastest year-over-year pace since 1982 — according to a report released last week by the Bureau of Labor Statistics. The report found that price increases have continued to accelerate so inflation seems here to stay, at least in the short term.
That’s even more likely as Russia’s invasion of Ukraine continues to drive up energy costs. Perhaps even more important, though, is that housing costs are rising, according to the BLS data. Energy prices are often volatile, but increases in housing costs tend to last.
The forecast is definitely troubling, but it’s important to keep in mind that inflation has already robbed nonprofits of almost 8 percent of the value of donations they received last year. Because so many organizations receive a significant amount of their donations at year’s end, the budget implications may only now be coming into focus.
Development officers need to tackle this problem head on in planning for the rest of this year’s fundraising efforts, including recasting their appeals to address what’s happening.
Inflation reduces the value of money, but some economists argue that most people don’t see it that way. According to the economic theory of the money illusion, people think about prices rising when in fact the purchasing power of each dollar is declining. The effect on donations is clear: Donors unknowingly reduce the value of their gift because they don’t see inflation as dropping the value of money.
The danger of the money illusion is not that donors want to give less; it is that they are inadvertently giving less because they don’t recognize the decreasing purchasing power of their donations. It can take years for donors to adjust on their own. That’s why it would be smart for fundraisers to be clear about the impact of inflation directly in their appeals.
If donors are used to giving a set amount — say, $100 or $1,000 — they will keep doing that even though that decision means nonprofits are not benefiting as much as they did from the same size gift before inflation began its rise. Donors will effectively be giving less without making a conscious decision to reduce their gifts’ size.
Many donors are not used to adjusting for inflation because they did not face the issue much throughout their adulthood. When inflation is in the 1 or 2 percent range, as it has often been over the past generation, the money illusion can slowly erode purchasing power, but the effect year over year is marginal. However, when inflation jumps, the value of money decreases rapidly, diminishing what a nonprofit can purchase with the donations received.
Even if inflation were to drop back to the levels we’ve experienced the last four decades based on Federal Reserve monetary policies, the adjustment will probably take some time.
Talking about how inflation is changing a nonprofit’s ability to meet needs — and deal with any increase in demands — is crucial to helping donors better figure out how to make a difference. Now is the time to review the standard donation levels on appeals and websites to ensure the amounts are in line with the costs incurred delivering services. It is up to the development staff to make donors aware that keeping the same gift size is in reality a reduction in their support. They can spell out exactly how they are meeting needs — and where their efforts are falling short as prices increase.
To be sure, the stock market has more impact on aggregate giving levels than inflation, so 2021 did not bring huge declines in charitable donations. But as the major U.S. indices have also been on a downward trend, 2022 may bring a double whammy. Donors will feel less wealthy because their stocks have lost so much value and may cut back on their giving, as they have done in the past.
What donors won’t be thinking about is the fact that as they cut back, their donations are worth less. Nonprofit organizations will be left feeling the squeeze.
It would be a mistake to think donors will figure out the impact of inflation on their own. They will continue to think that their donations have equal value. The money illusion diminishes a gift’s impact without donors realizing it. Nonprofits should show donors that when there is 8 percent inflation, 2 plus 2 no longer equals 4.
