The biggest economic story of the past year has no doubt been inflation. As the world has dug itself out of the COVID-19 recession, supply chain gluts and reduced labor supply has driven prices up across the world.
In the United States, inflation peaked at 9.1% in June of 2022, over quadruple the Federal Reserve’s goal of 2% inflation. Inflation has since cooled, dropping to 3% a year later in June of 2023 and staying in that area into the fall of 2023.
This nationwide price whiplash is likely to have an impact on practitioners of cost-benefit analysis and social return on investment analysis. Recently, in some of our work with Ohio University’s social return on investment analysis team, we had some conversation about the impact of inflation on valuation.
Inflation means dollar values can buy different bundles of goods over time. In general, it means that more dollars are needed to purchase the same goods or services as time goes on.
This has an impact on analysis that relies on monetization to compare goods and outcomes against one another. If one study monetizes the value of an outcome in 1990 at $100 and another study monetizes the value of a separate outcome in 2022 at $100, those two outcomes are not the same. The two values need to be brought to the same year value in order to be compared to one another.
Guides to social return on investment do not typically provide a lot of guidance to practitioners on how to incorporate inflation into their analysis. Social Value International’s Guide to SROI does not mention “inflation” throughout the entire document.
We were able to find one guidance document on social return on investment analysis that mentions inflation. New South Wales, Australia’s Department of Communities and Justice Guide to SROI recommends analysts “adjust dated historic values for cost inflation so that they can be compared to contemporary values.”
In response to this dearth of guidance on the use of inflation in social return on investment analysis, we have provided some tips for the practice.
Consider inflation when doing valuation
Whenever a number is reported, identify the year the data was collected. Adjust numbers to bring them in line with the year the social return on investment is being calculated for. This allows apples-to-apples comparisons to be made across time when conducting analysis.
Use the Bureau of Labor Statistics’s Inflation Calculator
The Bureau of Labor Statistics Inflation Calculator is an excellent, reputable tool for estimating the impact of inflation on average prices. To use the tool, set the first number and date based on the source and the final date based on the date the study period applies to.
Include both the original value and inflation-adjusted value in your SROI Model
Transparency is clear when modeling quantitative and monetized impacts of programs in a social return on investment analysis. Include both the original value from the study as well as the inflation-adjustment value in your documentation so people can see how the number was changed using the inflation adjustment.
While this adds another step, it makes the number transparent and easier to verify during data checking. It also makes clear that inflation adjustment happens, helping you to reduce the risk of accidentally doubling the inflation adjustment and making it clear to those who verify the analysis that inflation adjustment took place.
Use alternate inflation measures when appropriate
Some sectors of the economy grow faster than others. If a valuation refers to a sector that has grown faster or slower than the general economy, consider using a producer price index based on that specific industry rather than the consumer price index to more accurately reflect the changes in prices over time. This can make the analysis fall closer to the actual value when a market is being considered that has anomalous inflation over time.
These are just a few tips that can make your use of inflation in social return on investment more rigorous and bring your analysis close to the truth about the value of programs analyzed.