The Defense Department is fully admitting that its assumptions for inflation in 2023 were “obviously incorrect,” as the military’s top general put it, but the question of just how inflation will affect the Pentagon’s buying power is more complicated.
Defense Secretary Lloyd Austin, Chairman of the Joint Chiefs of Staff Gen. Mark Milley and DoD Comptroller Michael McCord represented the Pentagon’s vanguard in defending the $773 billion 2023 budget request to Congress on Tuesday.
The four-hour hearing heard questions about cyber attacks, Ukraine, coronavirus and the nuclear triad, but one question is looming over the Defense budget: Will current inflationary pressures impact DoD’s buying power?
Some lawmakers have tried to tie inflation and buying power as a one-to-one comparison. However, the triumvirate of Defense officials said deducing the military’s buying power in the current economic environment is not that simple.
Milley told members of the House Armed Services Committee that DoD’s assumed inflation for 2023 is wrong because the budget was created before prices started to rise and because Russia’s invasion of Ukraine added stress to the world economy.
“This budget assumes an inflation rate of 2.2%,” Milley said. “Right now it’s almost 8%. It might go up, it might go down, but most forecasts indicate it’s going to go up and it could level out at 9% or 10%. Who knows? But it’s clearly higher than what the assumption was in the budget.”
However, according to McCord, the inflation rate regular Americans see is tied to consumer goods, not to national security goods.
“We in the Defense Department have never used the Consumer Price Index as what is relevant for what we do,” McCord said.
McCord said what DoD assumed for 2022 was a 4% increase in prices and that is also what was built into the 2023 budget.
How exactly the current situation and the assumptions hold out compared to buying power is still being played out since the 2023 fiscal year hasn’t started yet.
“The inflation assumption rate starts six months from now and ends 18 months from now, so a lot can happen up or down to affect that,” McCord said.
That doesn’t hold true for 2022’s budget, which is currently feeling the impacts of a higher inflation rate than assumed. However, DoD has not released any calculations on reduced buying power.
The top Republicans for the House and Senate Armed Services Committees asked DoD to provide some answers on inflation in a letter last week.
“The inflation we are experiencing is effectively a 5% to 8% cut to the department’s buying power, which could amount to between $20 billion to $30 billion in unfunded costs in fiscal year 2022 alone, not to mention lost buying power in fiscal year 2021 and potential lost buying power in fiscal year 2023,” Sen. Jim Inhofe (R-Okla.) and Rep. Mike Rogers (R-Ala.) wrote in a letter to Defense Secretary Lloyd Austin.
Attached to the letter are 23 questions they want answered by April 15. Those include:
Has DoD appointed an official to lead inflation-related effects?
Does departmental leadership have a regularized meeting schedule to discuss inflationary effects on departmental budgets?
What major defense acquisition programs and middle-tier acquisition programs have seen the most and least inflation in the above time periods, and why do you believe these programs are experiencing these rates?
And what changes in behavior is DoD observing from the defense industrial base due primarily to the inflation spike?