Rising inflation will ramp up stratification in higher education

As the world economy recovers from the initial shock of the pandemic, inflation has increased sharply across most economies. The trend looks set to continue during 2022, posing challenges for central banks, households and many sectors of national economies – not least universities.

Prices have risen fastest in some emerging economies, such as Russia, Turkey and Argentina. But even the Organisation for Economic Cooperation and Development has seen some of the highest inflation spikes for more than 30 years, with the average consumer prices inflation rate reaching 5.8 per cent in November. In the US, it hit 7 per cent, while the UK’s figure was 4.8 per cent.

Many economists predicted that the post-Covid recovery would bring price pressures. There have been supply chain bottlenecks in key areas, such as microchip and electronic components. In the worst-hit sector, motor vehicle manufacturing, nearly 80 per cent of eurozone businesses reported input shortages at the end of last year.

This came on top of strains that were already showing in global supply and transport chains before the pandemic, threatening the common “just in time” business models that minimise the costs of carrying inventories – hence the widespread shortages in personal protective equipment early in the pandemic.

Another important driver of the price surge is rising energy costs – especially gas prices in Europe, where storage levels are low.

Then there are the tight labour markets that are putting pressure on wage costs in many economies. During the pandemic, jobs were protected by government schemes in most industrialised economies, and in some major economies, such as the UK and the US, there has also been a reduction in job market participation through retirement. In many northern European countries, the flow of temporary migrant workers in key sectors, such as food, transport, construction and hospitality, has also been disrupted – further aggravated in the UK by Brexit.

Many economists do not expect the inflation shock to subside until 2023. Indeed, further disturbances to supply chains from new Covid variants – or a conflict in Ukraine that disrupts gas supplies – could push it still higher. Moreover, for the supply-side inflation shock to dissipate (unlike in the 1970s), it needs to be temporarily absorbed through reductions in both profit margins and real wages. If, by contrast, the shock is built into higher inflation expectations and triggers “second-round effects” through higher wages and prices, it will require central banks to raise interest rates.

For the higher education sector, high inflation will have three major impacts. First, and perhaps most significantly, its differential effect on institutions will drive stratification.

Inflation will erode the real value of public higher education funding, especially as governments try to contain fiscal costs post-pandemic. In England, for instance, it will more quickly erode the value of fixed home undergraduate tuition fees, while in Scotland the draft higher education budget for 2022 proposes an overall cash uplift of just 2 per cent. So in the UK and other systems with a mixture of regulated and unregulated fees, the universities that will fare best will be those with the market power to cross-subsidise by increasing non-regulated fees (international and postgraduate) or commercial income.

In the US, stratification will also be driven by the high 2020-21 investment returns from which some private universities with substantial endowments have already benefited. In largely publicly funded systems such as continental Europe, inflation will probably see a more universal erosion of funding – especially in countries where higher education is considered a lower priority in economic recovery.

A second effect of higher inflation, where fees are market-based, will be increased uncertainty in strategic pricing behaviour. Universities operating in a competitive international market will need to invest considerable effort in understanding how their major competitors and primary markets will react. If the inflation shock is temporary, fee levels may be largely unchanged initially, as those universities with lowest market power move with caution. If it persists, however, that price stickiness will diminish as inflation is built into higher fees. Universities with the strongest market power will move more decisively to protect the real value of their fee income.

Third, inflation will have mixed effects on capital programmes. Construction and research infrastructure is one area where cost increases resulting from labour shortages and raw material costs will bite hard in 2022-23. This will be offset to some extent by inflation’s erosion of the costs of debt service for those universities that have borrowed over long periods at very low fixed interest rates. Provided they can protect their income from inflation, they will benefit.

Overall, universities have tended to fare less well at times of high inflation and fiscal retrenchment, especially where they depend on the public purse. Unless they can make an effective case for being central to the post-Covid recovery, even a transitory inflation shock in 2022-23 could be damaging for many institutions.

Increasing stratification and differentiation in higher education has already been a feature of the past decade, both between countries and within them. If inflation ramps that process up further, university leaders and boards will need to consider which stratum their institution realistically sits on – and review their strategies accordingly.

Sir Anton Muscatelli is principal and vice-chancellor of the University of Glasgow.