Inflation is a subtle yet relentless force that quietly erodes the purchasing power of currency over time. While its effects are often overlooked in day-to-day financial planning, the impacts of inflation on community associations, particularly concerning reserve studies, can be substantial and even abrupt. Community associations, which include townhomes, condos, HOAs, high-rise towers, and commercial associations, need to recognize the risks posed by inflation on their long-term reserve planning and take proactive steps to mitigate its consequences.
The Hidden Menace: Inflation’s Effect on Reserves
Inflation impacts far more than just day-to-day operational costs—it also plays a significant role in the long-term financial planning for major capital projects. While many community associations carefully budget for future expenses like roof replacements, repainting, or structural repairs, they often overlook the gradual but powerful effect of inflation on these reserve costs.
Inflation isn’t always a linear progression; it can remain relatively stable for extended periods, only to surge suddenly. This unpredictability can be particularly damaging for associations that don’t account for the future cost increases in their reserve studies. A prime example is Florida’s property insurance market in 2021, where stringent underwriting standards forced associations to replace roofs prematurely if they exhibited any sign of damage. Such abrupt changes can lead to unanticipated costs and stress on community budgets.
The Importance of Accounting for Inflation in Reserve Studies
Reserve studies are typically conducted with a multi-year planning horizon, often spanning 20 to 30 years. Failing to account for inflation can lead to a significant disparity between projected reserve expenses and actual costs. For instance, a community may plan for a roof replacement 20 years from now based on the costs of today, but without considering inflation, they could face substantially higher expenses in the future.
Here’s where community associations should consider an inflation-adjusted approach in their reserve studies:
Regular Updates: Reserve studies should be updated periodically to align with the changing economic landscape. By monitoring and accounting for inflation in each update, associations can ensure their financial planning remains current and accurate.
Engaging with Experts: Collaborating with experts who are well-versed in inflation trends can be invaluable. Financial professionals can provide insights into expected inflation rates and offer guidance on adjusting reserve allocations accordingly.
Vendor Collaboration: Establishing relationships with preferred vendors for major projects is another effective strategy. These vendors can provide price estimates that consider anticipated inflation, helping associations plan more accurately.
Historical Lessons from the CPI
The Consumer Price Index (CPI) offers historical insights into inflation rates, revealing years of both stability and volatility. For instance, during the 1970s and early 1980s, the CPI experienced double-digit inflation rates due to economic factors like the oil crisis. This highlights the importance of staying vigilant and adaptable in reserve planning, especially for community associations.
The following table presents the annual inflation per the CPI to give you an idea of what the inflation rate is per year:
Decade
Start of Decade CPI
End of Decade CPI
Approx. Decade Inflation (%)
1910s
9.9 (1913)
17.3 (1919)
+74.7%
1920s
20.0 (1920)
17.2 (1929)
-14.0%
1930s
16.7 (1930)
14.1 (1939)
-15.6%
1940s
14.0 (1940)
24.0 (1949)
+71.4%
1950s
24.1 (1950)
29.2 (1959)
+21.2%
1960s
29.6 (1960)
36.7 (1969)
+24.0%
1970s
38.8 (1970)
72.6 (1979)
+87.1%
1980s
82.4 (1980)
124.0 (1989)
+50.5%
1990s
130.7 (1990)
166.6 (1999)
+27.5%
2000s
172.2 (2000)
214.5 (2009)
+24.6%
2010s
218.1 (2010)
255.7 (2019)
+17.2%
2020s*
258.8 (2020)
304.3 (2023 est.)
+17.6% (in just 3 years)
“Data adapted from the Minneapolis Federal Reserve CPI historical data (https://www.minneapolisfed.org).”
Associations should be proactive in updating their reserve studies to reflect the realities of inflation and its potential for sudden acceleration. While inflation may be invisible, its impact on financial planning is undeniable. Recognizing and addressing this risk can help associations ensure that they are financially prepared for the unpredictable changes that inflation can bring. As we move further into 2023 and beyond, diligent reserve planning, accounting for the changing landscape of inflation, will be more critical than ever.
