How much does inflation actually matter to DoD and can it be fixed?

The word inflation is being bantered about in Congress relating to the Pentagon’s 2023 budget quite a bit as senior leaders justify their funding decisions for the upcoming year. However, how important is inflation to the actual military budget, especially when the budget, after all, is just a recommendation?

Last week, the Defense Department provided important information to Congress on how it is thinking about the nation’s inflation rate in terms of next year’s budget.

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The word inflation is being bantered about in Congress relating to the Pentagon’s 2023 budget quite a bit as senior leaders justify their funding decisions for the upcoming year. However, how important is inflation to the actual military budget, especially when the budget, after all, is just a recommendation?

Last week, the Defense Department provided important information to Congress on how it is thinking about the nation’s inflation rate in terms of next year’s budget.

The letter, requested by both Armed Services Committees’ ranking members, provided tidbits of insider knowledge on what DoD does at a time when its budget isn’t meshing with the economy.

The Pentagon uses the Gross Domestic Product (GDP) chain-type price index, not the inflation rate, as its baseline for measuring changing from year to year for building its budget estimates.

The GDP price index measures the inflation in the prices of goods and services produced in the United States and the product price for U.S. goods and services exported to other countries. It doesn’t measure what average consumers feel in price changes, mainly because DoD is not buying things the same way as U.S. citizens.

“We in the Defense Department have never used the Consumer Price Index as what is relevant for what we do,” DoD Comptroller Michael McCord told Congress last month when he testified before the House Armed Services Committee.

McCord and the military service chiefs told Congress in their letter that they assumed a 3.1% GDP inflation peak in 2021 and a 3.9% peak in 2022. According to Seamus Daniels, associate fellow at the Center for Strategic and International Studies (CSIS), DoD thought the inflation would level out at 2%.  All of those numbers are taken into account to come to a final average DoD uses. For 2023, it is 2.2%. That doesn’t take into account fuel, pay and a few other products where DoD uses specialized indices.

“The GDP has proven to be the most useful index because it reflects the types of purchases DoD makes — large end items and contracted services,” the letter reads.

The current CPI as of March is 8.5%, while the GDP index clocked in at 8% for the first quarter of the 2022 fiscal year, according to the Bureau of Labor Statistics. That number is obviously much higher than the 2.2% DoD assumed for 2023. Chairman of the Joint Chiefs of Staff Gen. Mark Milley said as much.

“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.”

That leaves a 4% to 6% gap to fill depending on the numbers.

However, one thing DoD wants everyone to keep in mind is that it is still 2022, no one knows what the inflation rate will be in 2023.

“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.

Who holds the purse strings

Still, it’s a dangerous game of chicken to play when careening toward the next fiscal year and waiting to see what will happen to the inflation rate.

DoD is by no means advocating for that, by the way. But, budget officials created the budget months beforehand in preparation of explaining DoD’s needs to lawmakers.

“The department added approximately $20 billion per year to the department’s topline profile over the 2023-2027 future years defense plan, compared to the profile in the 2022 budget,” the letter reads. “Of that amount, approximately $14 billion per year reflects updated pricing for the purchase of goods and services and the other $6 billion per year addresses higher pay and compensation costs.”

DoD has not developed any legislative proposals that would respond to inflation at this time.

However, DoD says its planning is all sound, even if the dollars might not add up properly now that inflation is higher.

“We have put together a program that I am very comfortable can execute the force planning construct,” Deputy Defense Secretary Kathleen Hicks said last week. “I’m very comfortable with what we have built out and capabilities that we need to do that. I think we get very focused in this town, because it’s simple, on the dollars.”

Mark Cancian, a senior advisor at CSIS, said DoD did have the time to adjust for inflation, even just a bit.

“They walked in this budget at a time when they thought that they can control inflation and at a time that it was not going to go higher,” he said. “On the other hand, they didn’t send the budget in until the end of March, which gave them a lot of time to make adjustments if they really had wanted to. It is true, that with the usual budget cycles, they locked this in before the high inflation was clear. On the other hand, they did not take advantage of the extra time that they had to redo the inflation calculations.”

Republicans have railed against DoD for not taking inflation into account.

“Overall, we are concerned that the Department is not taking a proactive stance to mitigate the harmful effects of inflation,” Sen. Jim Inhofe (R-Okla.) and Rep. Mike Rogers (R-Ala.) the ranking members of the Armed Services Committees wrote to the Pentagon.

“At the very least, they should be collecting necessary data, establishing a governance framework and conducting regular touchpoints with all stakeholders. In particular, it doesn’t seem that the department has a good grasp on how inflation is hurting our service members and their families — and how this is in turn impacting recruiting and retention. Likewise, we are concerned that the department does not have an adequate understanding of the challenges facing the industrial base.”

However, at the end of the day, Congressional appropriators hold the purse strings.

An old joke in Washington is that the budget goes directly from the White House to Congress to the wastebasket.

If DoD’s plan is sound, as Hicks asserts, and Congress thinks DoD needs more money to get to its goal, then it can simply appropriate more money, as it did for the 2022 budget.

Appropriators found the Biden administration’s 2022 request too low for 2022 and bumped up the final topline by $30 billion or about 4%.

Political football?

So is the hubbub about inflation just a way to pin inflationary issues on the Biden administration?

Yes and no. Cancian and Daniels say it’s partly DoD’s fault, but it might not be as bad as some lawmakers are making it out to be.

DoD could have sent in better numbers or assumed a higher inflation rate just in case, but it’s not always easy.

“Inflation assumptions are just estimates,” Daniels said. “Everyone is making their best guess.”

Congress still has plenty of time to add funds to the Defense budget and ensure inflation doesn’t hurt DoD’s 2023 buying power.

“Politics are always going to come into play when it comes to the Defense budget,” Daniels said. “I think Republicans’ biggest qualms are that the assumptions were wrong.”

There is one thing that can be agree upon though: DoD is willing to work with Congress to find a budget that works. Hicks made that abundantly clear last week.

Cancian said that as long as Congress doesn’t mess with DoD’s plan to slightly decrease some troop levels and divest from legacy systems then the two should play nice.

 

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