U.S. Representative Mike Rogers (R-AL) and U.S. Senator Jim Inhofe (R-OK), ranking members of the House and Senate Armed Services Committees, today announced that they have requested information on the effects of inflation on the Department of Defense budget from Pentagon leadership and the military services.
"For the second year in a row, President Biden has submitted to Congress an inadequate defense budget that does not provide the real growth we need to counter China. As Congress considers this request, it's clear we need to dig in further on how inflation is affecting the Department of Defense's buying power now and into the future," Rogers and Inhofe said in a statement.
In letters sent to Secretary of Defense Lloyd Austin, Chairman of the Joint Chiefs of Staff Mark Milley and the secretary and chief of each service, Rogers and Inhofe note that current inflation is "effectively a 5 to 8 percent cut to the Department's buying power, which could amount to between $20-$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." Yet the fiscal year 2023 budget request, released yesterday, only accounts for inflation in the 2.3 to 2.6 percent range.
"It's ignorant to believe these historically high inflation rates aren't hurting our service members just like they are every other American family," Rogers and Inhofe said in a statement. "Beyond that, inflation is also driving up key military needs like fuel, as well as the cost of labor and supplies — but this budget doesn't appear to address that reality. We need to understand what assumptions the Department is operating under, how they arrived at their inflation estimate, and how Congress can help meet the needs of our military as we develop our own recommendations for the 2023 fiscal year."
Rogers and Inhofe requested explanations about how the administration estimates inflation, how inflation has affected key defense activities and funding pots, and how inflation is affecting the defense industrial base, as well as how Congress can help mitigate the harmful effects of the current inflation spike — among other information. The members asked for responses by April 15.
Last week, Rogers and Inhofe led 38 other Republican members of the Senate and House Armed Services Committee sent President Biden a letter urging him to prioritize 5 percent growth above inflation for the fiscal year 2023 defense budget.
The full letter can be read below:
We write you to request information from the Department of Defense (DOD) regarding the observed and anticipated effects on inflation on the Department's budget, both in the recent past and the near future.
The fiscal year 2021 president's budget assumed a total DOD inflation rate of 2.1 percent for budget authority in fiscal year 2021, and the 2022 president's budget assumed an inflation rate of 2.3 percent for budget authority in fiscal year 2022, per DOD Green Book Table 5.1. However, observed inflationary effects by any measure—consumer price index (CPI), personal consumption expenditures (PCE), Gross Domestic Product (GDP) price index—were significantly higher.
According to the Bureau of Labor Statistics, the annualized CPI-U rate for the 12-month period ending February 2022 was 7.9 percent, the highest rate in 40 years — which directly damages the purchasing power of every DOD servicemember and civilian. According to the Bureau of Economic Analysis, GDP price index rates have been not that far behind, particularly in the latter half of fiscal year 2021 and the first half of fiscal year 2022. Beyond stressing U.S. personnel, high inflation is also affecting U.S. operations, training, research and development, and procurement. As Under Secretary of Defense (Comptroller) Mike McCord said, "The big concern that we've had, that I've had, is catching up…The biggest near-term concern that we have really is the inflation that did occur in '21 that was higher than projected, the inflation that occurred in '22 that was higher than projected."
Put simply, the inflation we are experiencing is effectively a 5 to 8 percent cut to the Department's buying power, which could amount to between $20-$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.
Had a Future Years Defense Program (FYDP) been submitted with the fiscal year 2022 request, as required by law, we understand it would have underestimated inflation at roughly 2 percent in each of fiscal years 2023 through 2026. Thus, the current 5 to 8 percent inflation spike will compound with the likely higher inflation in these future years making the FYDP and the plans it supports even further from being fully funded and even more unrealistic as compared to the current fiscal year.
We know that inflationary effects will differ by activity, and that the economic indices commonly used to measure inflation, such as CPI-U or GDP Price Index, will not translate perfectly to the composition of the DOD budget. Yet many of the core components—fuel, cost of labor, cost of supplies—are not fundamentally different from the non-defense economy. In fact, we understand that historical inflation in many DOD appropriations accounts has routinely outpaced non-Defense inflation benchmarks.
The bipartisan 2018 National Defense Strategy Commission called for 3 to 5 percent annual real growth in the DOD budget. The unprecedented scale, scope, and rapidity of Chinese military modernization, in concert with a simultaneous worsening of all other stated national security threats, supports nothing less. Yet the inflationary effects of the past year has made it even more difficult to measure "real" growth. We are concerned that the Pentagon may actually be losing buying power, even as Congress has taken bipartisan action to implement real growth in the defense budget.
Based on these and other considerations, we are seeking clarity on DOD observations and planning related to inflation in the recent past and the near future, and therefore submit questions as specified in Enclosure A for the Department of Defense. Please submit the requested information to the Committee on a rolling basis when ready, but no later than April 15, 2022. Responses may be supplemented via classified communication where necessary.
Thank you in advance for your responsiveness.
Sincerely,
Enclosure A
What are the inflation baselines from which DOD is measuring actual inflation in fiscal years 2021 and 2022?
Please provide this planning guidance.
To what extent has the Department captured the actual inflation differences, by appropriations account or other category of measure, in relation to the benchmarks in question 1?
Please provide the details of such differences.
Has DOD promulgated internal guidance regarding the collection of actual inflation-related data in fiscal years 2021 and 2022 to DOD components and/or contractors?
If so, what types of data elements are suggested or required to be collected?
If so, does the guidance included qualitative data in addition to quantitative data?
If so, please provide this internal guidance and a summary of the data collected.
Has DOD contracted with any non-DOD entities for the purpose of studying the effects of inflation on DOD?
If so, please describe.
Has DOD identified one senior official to lead inflation-related efforts?
If so, please describe.
To what extent are Cost Assessment Data Enterprise personnel involved in efforts to identify necessary data elements and collection methods for inflation-related data?
What governance framework is in place for senior leadership to measure, track, and understand inflationary effects?
Have inflationary effects been added as a module in senior leadership ADVANA dashboards and/or other decision support tools?
Does departmental leadership have a regularized meeting schedule to discuss inflationary effects on departmental budgets?
What was the actual observed inflation rate in fiscal year 2021for DOD, compared to the 2.1 percent assumed in the budget request?
What are the current actual and estimated inflation rates for fiscal year 2022, compared to the 2.3 percent assumed in the budget request?
What are the observed and anticipated global inflationary effects on the following activities currently, for the fiscal 2021 time period, for the first six months of fiscal year 2022, for the final six months of fiscal year 2022, and for fiscal year 2023?
Military personnel basic pay
Civilian personnel salaries
Basic allowance for housing
Fuel, all types
Operations, other than fuel
Maintenance
Military construction
Facilities sustainment, restoration and modernization
Research, test, development, and evaluation
Procurement
What are the observed and anticipated global inflationary effects on the following appropriations accounts currently, for the fiscal 2021 time period, for the first six months of fiscal year 2022, for the final six months of fiscal year 2022, and for fiscal year 2023?
Military personnel
Operations and maintenance
Research, development, test, and evaluation
Procurement
Military construction
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?
How many service requests for prior approval reprogrammings related to inflationary effects is the Under Secretary of Defense (Comptroller) currently in receipt of? What is the total value of those reprogrammings?
How many service requests for internal reprogrammings related to inflationary effects is the Under Secretary of Defense (Comptroller) currently in receipt of? What is the total value of those reprogrammings?
Has DOD received any requests for equitable adjustment based on inflationary effects? If so, please provide a list or table of such requests, with associated percentage adjustments by contract and the associated current disposition of such requests.
To what extent has DOD authorized contracting officers to enter into negotiations for economic price adjustments (EPA) or other contract modifications to account for inflation?
If EPA authorization has not been widely approved and encouraged, why not, and what is the Department's plan to exercise such authorities?
What changes in behavior is DOD observing from the defense industrial base due primarily to the inflation spike, including but not limited to: increased inability to obtain quotes for future labor rates or material costs; increased "no-bid" positions on solicitations; higher fixed-price contract bids; and a preference for or condition of only cost-plus contracting terms?
What is the methodology used by DOD and the Office and Management and Budget (OMB) to determine the inflationary rates by appropriation account in Chapter 5 of the fiscal year 2022 Green Book?
What measure of inflation does DOD/OMB use to measure inflationary effects on servicemember benefits/buying power? If this measure is not closely related to CPI-U or PCE, why are those measures inapplicable?
How has the current inflation spike changed the outlook for budget execution in the years that would be in the fiscal year 2022 FYDP?
What steps are you taking or considering taking to mitigate the current inflation spike and the compounding effect it will have in future years?
Has DOD developed any legislative proposals that would help the Department respond to inflation proactively or within the year of execution, instead of after the fact?
What additional authorities should Congress consider providing in the fiscal year 2023 NDAA that would be helpful to mitigate the current inflation spike and projected impacts?
