High levels of inflation are set to persist for some time. This presents profound challenges for charities – for their staff, volunteers, beneficiaries, donors and finances. The one thing that every charity, regardless of size or structure, can do to prepare for this period is to increase their understanding of the impact of inflation on their environment. This briefing is designed to aid charities in doing that.

Charity costs are set to rise as a result of inflation. In particular:

• The rising cost of energy and other goods has already affected beneficiaries, volunteers and staff but is set to get worse. Charities’ energy costs are also set to be impacted. 
• Charities will have to increase staff costs. But were the sector’s expenditure on staffing costs to keep up with inflation, the sector would need to find an additional £3.8bn by 2023 and £6.1bn by 2024, based on current expectations.

Inflation will affect charities’ income. Not only will the public have less available to give but:

• The value of the average donation and direct debits will decline. The average donation has been stuck at £20 since 2017. Using the Bank of England’s most recent inflation forecasts, we project that a £20 direct debit set up in 2017 will be worth a mere £15.30 next year and £14.90 in 2024.
• The value of multi-year contracts and grant funding will decline. A three-year £100,000 grant or contract awarded in 2022 will be worth £90,660 next year and £88,300 in 2024, based on current Bank of England forecasts. It is essential that inflation is taken into account when bids and applications are being made.

Additionally, inflation will eat into charities’ reserves. For example, prior to the pandemic, charities with income between £500,000 and £1m had on average 4.21 months of expenditure held in reserves as cash. By 2023, those reserves would cover just 3.48 months of activity if expenditure by those charities rises in line with inflation. This means that a typical charity with an income of £1m in 2021 would need to increase its reserves by £73,430 by 2023 to make up that gap. 

Pro Bono Economics will continue to provide the social sector with the economic analysis it needs at this challenging time, while CAF will continue to support charities and donors with research, advice and through its product offering.

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