by Jamie O’Halloran, Economist 

The luxury of being unconcerned about inflation in the UK has ended abruptly. Inflation has climbed to historic levels as a result of supply issues borne out of the pandemic and Brexit, with increasing gas prices a major concern.

But what does this actually mean for charities? What should boards and leadership teams be planning for?

Figure 1 - Inflation is rising. The OBR expects an inflationary peak in April this year

Prices are expected to rise across the board. By how much is unclear, but the latest information from the ONS published today indicates that inflation was already at 5.4% in December, and the Bank of England now predict that inflation will peak at around 6% in April this year.

And these increased rates aren’t likely to vanish any time soon. We currently expect inflation to return to ‘normal’ levels of 2% in 2024, though there is great uncertainty in these estimates.

How does this affect your charity?

There are three main ways in which inflation is likely to affect charities: rising costs – particularly for staff, depreciating income, and the impact on beneficiaries’ finances changing demand levels.

1. Charities will see costs rise, especially for staffing

A rise in prices impacts the goods and services that charities buy and provide, impacting how much they can deliver.

One of the most notable cost increases the charity sector can anticipate will arise from salaries. The most recent NCVO almanac found that staffing costs account for 37% of total charity sector expenditure, or around £20.4bn. For charities to ensure that wages don’t fall in real terms as a result of inflation, they would need to spend an additional £2bn in 2024, an increase in total wages of 8.8% from 2021. This means that a charity with an expenditure of £1m would need to spend an extra £32,600 on wages in 2024 to ensure their staff are not worse off.

It is unlikely that many charities will feel able to raise pay by this much, particularly as this cost comes in addition to the new National Insurance rates increase from April 2022 and the subsequent Health and Social Care Levy starting in April 2023.  However, the sector already has issues with low pay. The Living Wage Foundation found that 17% of all third sector workers earn less than the real Living Wage, which jumps to 29% of all part-time sector workers, the majority of whom are women.

If salaries start reducing in real terms, there is a risk of significant staff churn in the sector. If that occurs, charities may struggle to replace staff – as many are already experiencing a shortage of job candidates. CharityJob has found that the number of applications per job had already fallen across the pandemic. Salaries failing to keep up with inflation will likely exacerbate these skills shortages.

Thus, it is important for charities to be thinking about wage negotiations as early as possible, while also realising that many of their staff are likely to be struggling already.

2. Charity income is unlikely to keep up with inflation

There is a risk that as costs rise, the income of overall charities will struggle to keep pace. At an overall level, the cost-of-living squeeze resulting from inflation may affect the level charitable donations. Previous PBE analysis found an association between real terms consumption and charitable income, as shown in Figure 2. If the association between consumption and charitable income continues to hold, charities are likely to see a reduction in their income, as consumption is likely to fall over the coming period of uncertainty and high inflation.

Figure 2 – There is an association between charity income and consumption

At a more granular level, there are three prominent areas of charity income that are vulnerable to being substantially affected by inflation.

Firstly, there are donations which have been anchored, such as those anchored in time like historic direct debits, or those anchored in certain norms, where individuals have a set amount in mind that they wish to donate. This set amount is unlikely to change with inflation. Taking the most common gift amount of £20 – which the CAF survey of 2019 estimates to be the median donation per month – shows us how the value of anchored donations will depreciate. As Figure 3 demonstrates, the real value of a donation of £20 made in 2020 will have fallen to £17.20 by 2026, a reduction of 14%.

Therefore, it is important for charities to have discussions around levels of giving by their donors – particularly those on direct debits – and to update their estimates of what services cost to deliver as inflation continues to drive those figures up.

Figure 3 - The expected value of £20 donated in 2020 will fall to £17.20 by 2026  

Secondly, grants which have been awarded recently will significantly devalue in 2022/23. If an organisation is awarded a grant of £100,000 per year in 2021 for the next three years, the 2023 grant would be worth £94,000 after accounting for inflation, a reduction of 6%. Charities applying for grants and funders dispersing them will need to take this into consideration when considering financial decisions.

Finally, the sector as a whole is a net saver, not a borrower. With high rates of inflation, money held in reserve is at risk of losing its value. Interest rates remain incredibly low even after a slight increase by the Bank of England. This should prompt further discussions about investment strategies for those organisations with reserves. Charities which are close to or below their reserves policy are more likely to need to hold this conversation. Charities which have excess funds need to ensure the money is being worked hard to minimise the fall in its value.

3. Changes in demand due to the cost-of-living squeeze

The most deprived households’ budgets are already under severe stress, driving high demand for charities supporting those living in poverty. We are already seeing increases in food prices with the average monthly food shop increased by £15 in December alone.

The vulnerable will likely be the hardest hit by the rise in inflation. The government has announced that benefits will rise by 3.1% while the OBR expect that the price of goods will rise by 5.5%. This results in the real value of benefits falling 2.4 percentage points in value by April 2022. In light of the gap between the cost of living and the uprating of UC, the JRF have previously estimated that 100,000 individuals will be pulled deeper into poverty if inflation rates hit 4.4% in April. With inflation now expected to be higher than 4.4% in April, we are likely to see an even greater number of people in deeper poverty.

This is likely to drive up the demand for many charities’ services. Trussell Trust research has found that benefit rises lead to a drop in the number of food parcels they need to provide, while falling benefits drive up demand. Using their calculations, we estimate that the reductions in Universal Credit we’ve seen this autumn could lead to an increase in demand for food parcels from foodbanks equivalent to 16 parcels per 1000 people or around 1,700 parcels for the average Local Authority per year. This pattern of rising demand won’t be restricted to foodbanks of course, but felt by the many thousands of other charities supporting those on low incomes.

The rising cost of living is also likely to affect charities such as visiting museums, theatres, and exhibitions, which provide services that people consume more of as their income increases. Inflation may suppress footfall for these cultural charities, as people have less disposable income available to purchase tickets, leading to falling revenues.

What can the sector do?

As higher rates of inflation are predicted to last until at least 2024, it is important for charity boards and leadership teams to factor higher than anticipated costs into any planning assumptions.

The key messages from this analysis for charities is that they need to:

1. Determine if the demand for their services is likely to change and plan for it.
2. Enter wage negotiations early and appreciate many are likely to be struggling.
3. Revise income targets and plan how to deliver them in the context of inflation.

To navigate all three of these, having the best understanding possible of the trends we’re seeing in the economy is key. PBE will keep charities up to date with the information they need – but you can help us by letting us know what you’d find most useful by clicking the button below to fill in a quick survey.