Periods of elevated inflation often prompt community associations to ask a reasonable question: Should the inflation rate in the reserve study be increased significantly to reflect today’s economic conditions? While understandable, the answer is generally no.

A reserve study is a long-term financial planning tool, and the inflation rate is only one of three methods used by reserve analysts to account for changing costs over a 30-year projection. Simply increasing the inflation assumption by a large margin may appear prudent, but it often produces unintended consequences that can significantly overstate future reserve contributions.

Understanding How Inflation Is Addressed

The inflation rate in a reserve study is a parameter that applies throughout the entire 30-year funding plan. Because it affects every reserve component over the life of the study, changes to this assumption should be made cautiously.

Rather than relying solely on the inflation parameter, experienced reserve analysts typically address inflation through a three-step process.

1. Apply a One-Time Cost Adjustment

During each reserve study update, current replacement costs are first adjusted to reflect today’s market conditions. This one-time adjustment is often higher than the study’s ongoing inflation assumption.

For example, following the pandemic, Browning Reserve Group increased the replacement cost of every component by 6% during 2023, rather than applying the prior ongoing inflation rate of 2.5%. This adjustment recognized the rapid escalation in construction costs at that time while avoiding the mistake of assuming those extraordinary conditions would continue for the next three decades.

This one-time adjustment is reevaluated annually based on current market conditions.

2. Reprice Components Using Current Market Data

Not every reserve component experiences inflation equally.

During the update process, analysts review individual components and adjust costs based on actual pricing within the client’s geographic region. Labor shortages, supply chain disruptions, tariffs, material availability, and regional construction trends are all considered when determining current replacement values.

This component-by-component review produces a far more accurate reserve study than applying a blanket inflation increase across the board.

3. Evaluate the Long-Term Inflation Rate

Only after current costs have been updated should the analyst evaluate the study’s ongoing inflation parameter.

In many cases, the existing assumption remains appropriate. For associations seeking a more conservative funding strategy – or those with significant life-safety infrastructure such as elevators, roofing systems, or domestic water systems – the long-term inflation assumption may be increased modestly to 3.0% or 3.5%.

In our experience, inflation assumptions exceeding 3.5% are generally outliers and rarely justified for long-term reserve planning.

The Risk of Overreacting

Increasing the long-term inflation rate substantially may seem like a conservative decision, but because the assumption compounds over every component for 30 years, the resulting reserve contribution requirements can grow dramatically.

For associations that are already adequately funded, this can result in unnecessarily high annual reserve contributions.

For underfunded associations attempting to catch up, the consequences can be even more severe. Large projected contribution increases may become unrealistic, creating financial plans that boards are unlikely to implement successfully.

A measured, multi-step approach produces projections that better reflect both current market realities and long-term economic expectations.

Lessons from Previous Economic Cycles

Reserve professionals have navigated unusual economic conditions before.

In the mid-1990s, financial institutions were offering certificates of deposit with guaranteed interest rates approaching 7%. Rather than assuming those returns would continue for the next 30 years, reserve studies increased long-term interest assumptions only modestly – from approximately 3% to 4% or 4.5%. Within a decade, interest rates had fallen below 1%, reinforcing the importance of avoiding assumptions based on temporary market conditions.

A similar lesson emerged during the 2008 financial crisis.

Interest rates declined sharply while inflation remained relatively stable – and in some sectors, deflation occurred. Contractors reduced prices simply to remain competitive. Although reserve studies incorporated those lower costs where appropriate, analysts did not assume those unusually low prices would persist indefnitely. Future costs were adjusted toward long-term historical averages, resulting in funding plans that remained realistic as markets recovered.

Important Consideration: Inflation Is Only Half the Story

One of the greatest challenges associations face during periods of high inflation is not inflation alone – it is the relationship between inflation and investment returns.

When reserve funds earn relatively low interest while construction costs increase rapidly, purchasing power declines. Although rising interest rates help narrow this gap, the difference between inflation and investment earnings often has a greater impact on reserve funding than inflation by itself.

The Best Safety Net: Annual Updates

Perhaps the greatest advantage community associations possess is that reserve studies are not static documents.

Annual updates allow reserve analysts to incorporate real-time replacement costs, adjust funding assumptions, evaluate economic trends, and refine the funding plan based on current conditions rather than speculation.

This ongoing process provides boards with more accurate financial guidance while avoiding overreactions to temporary economic events. It also demonstrates responsible stewardship of association assets and gives homeowners greater confidence that reserve contributions are based on sound analysis rather than short-term market volatility.

Reserve studies are designed to support informed decision-making over decades – not to chase today’s headlines. By combining current cost updates, component-specific pricing, and prudent long-term assumptions, associations can navigate periods of economic uncertainty while maintaining realistic and sustainable reserve funding plans.

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