World Bank report warns of economic impact of Russia’s invasion of Ukraine
A new report from the World Bank has sounded the alarm on the far-reaching economic effects of Russia’s invasion of Ukraine.
Published in June 2022, the Global Economic Prospects report warns that the ongoing war has “magnified the global economy’s slowdown”— a downturn sparked by a combination of pandemic-fueled supply chain disruptions, federal stimulus spending, and rising interest rates—leading economies across the globe into an extended period of slowed growth and elevated inflation.
This combination of factors runs the “considerable” risk of leading the United States into the most dire of economic circumstances: a phenomenon called stagflation. Case studies affirm that nonprofits may already be feeling the repercussions.
What is stagflation?
Stagflation, a combination of the words “stagnation” and “inflation,” is a rare economic trend that occurs when the prices of consumer goods continue to rise despite slowed economic growth and rising unemployment. It’s a particularly unusual and insidious combination, last seen in the United States in the 1970s.
Stagflation combines two situations that are usually at odds with each other: rising prices and falling economic output. This combination decreases individuals’ purchasing power via eroding their income and savings. Meanwhile, businesses and nonprofits are forced to decelerate investments, restrict wage increases, and curb hiring.
For nonprofits across the United States, the effects of stagflation may have already arrived.
Here’s what that looks like:
Increased prices cut into budgets
As inflation rises, the cost of providing services and operating buildings increases, while the amount of money that donors have to give away decreases.
David Lipsetz, CEO of the Housing Assistance Council—a national nonprofit that supports affordable housing efforts throughout rural America—says that inflation has already begun to paralyze their housing projects.
The Housing Assistance Council operates by underwriting loans for housing developments at below-market rates. “When the price of building materials increases 10%, there’s usually no room in the loan to accommodate that increase,” Lipsetz told the Associated Press.
“It’s stalled countless projects for us, right in the middle of a period of time when housing and shelter are the most important things needed to weather the storm of a pandemic…for us, a modest increase in costs can shut down a project in an area of the country where it’s needed the most.”
Impact on government aid
As of July 2022, inflation is the highest it’s been in 40 years. It’s expected to peak around 9%.
In a February 2022 article titled “Nonprofits and Foundations Need to Be Prepared for the Effects of Inflation on Services, Operations, and Endowments” Leslie Lenkowsky of Indiana University’s Lilly School of Philanthropy warns that the effects of inflation typically fall hardest on “discretionary” government programs like Head Start and community economic-development projects, which often support the activities of nonprofit groups.
In order to mitigate and prepare for the potential loss of government support, organizations with endowments will need to pad their budgets by finding ways to increase their return on investments.
“From 2016 through 2020, a sample of 705 higher-education institutions earned an average of 5.1% annually on their assets after expenses, according to the National Association of College and University Business Officers,” Lenkowsky writes. “In today’s economy, that would become a loss of 2.4% after adjusting for inflation.”
Impact on individual donations
Stagflation is a devastating force on people’s savings accounts and income. As Lenkowsky explains—when “ordinary givers” are forced to pay increased prices for essential purchases, they are “unlikely to increase contributions enough to compensate for lowered purchasing power.” Wealthy donors who hold assets like fixed-interest bonds—which are particularly vulnerable to inflation—may also feel compelled to cut back on giving in times of stagflation.
In a March 2022 article for the Chronicle of Philanthropy, author Gregory Witowski—a senior lecturer in the nonprofit management program at Columbia University—highlights the stark and multifaceted reality of inflation’s impact on nonprofits’ financial health.
“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,” Witowski writes. “What donors won’t be thinking about is the fact that as they cut back, their donations are [also] worth less. Nonprofit organizations will be left feeling the squeeze.”
Employee wages stay stagnant as the cost-of-living increases
Inflation has not yet peaked, yet nonprofit employers are already feeling its effects on their operating budgets.
Nonprofits often operate on grant money— and as we noted in the February 2022 article “Inflation spells bad news for nonprofits,” these rewards are based on a proposed budget and do not account for adjustments in inflation. That means that “if your nonprofit were to receive a grant for $200,000 annually for five years, and if inflation increases by 5% per year, your $200,000 will be significantly less valuable by year five.”
An April 2022 testimony on the blog Nonprofit AF illuminates this reality, confirming the deep financial strains that organizations are already experiencing as inflation continues to rise.
“We are building our budget for our FY23, which starts on July 1,” an anonymous nonprofit employer writes. “Much of our funding comes from grants that extend past the fiscal year. That means the budgets were built based on salaries from the beginning of the current fiscal year or earlier. In the very low inflation period now in the rear-view mirror, it wasn’t such a big deal if we added an unfunded COLA [cost-of-living-adjustment] at the rate of inflation, since it was in the neighborhood of 2%. However, in a world of 8% inflation, if we give our staff a COLA that matches the rate of inflation, we bust our budget. So, we are forced to choose between the fiscal sustainability of the organization and the wellbeing of our staff.”
Stay tuned for part two of this blog series, which will detail how nonprofits can mitigate and prepare for continually rising inflation and stagflation.
Lia Tabackman is a freelance journalist, copywriter, and social media strategist based in Richmond, Virginia. Her writing has appeared in the Washington Post, CBS 6 News, the Los Angeles Times, and Arlington Magazine, among others. She writes weekly nonprofit-specific content for 501c.com.
