Continued inflation wrecks deterrence – China and Russia will outpace the US in military modernization which increases the risk of conflict and escalation

For decades, inflation averaged around 2 percent per year. Since early 2021, however, it has grown to 8-9 percent. The 2021 and 2022 defense budgets were developed before the onset of this rapid inflation and DoD is experiencing a significant loss of buying power as these funds are expended. Similarly, the 2023 budget was submitted to Congress before it was known how high inflation would rise and therefore significantly underestimates the funding requirement for the programs the Department wants implemented. This paper reviews the impacts of inflation on the defense budget and defense industrial base (DIB), provides estimates of specific impacts of inflation, and provides strategies for how Congress can address inflation. This loss of defense buying power comes at a perilous time. The 2022 National Defense Strategy (NDS), reaffirming the 2018 NDS , highlighted the re-emergence of threats from near peer competitors after decades of focus on terrorism and regional threats. China and Russia were not idle while the U.S. focused on terrorism following the September 11, 2001 attacks. They invested in their own modernization and in their forces. And as they have grown more militarily capable, their aggressiveness has increased, including on vivid display now with Russia’s invasion of Ukraine and with China’s increased belligerence towards Taiwan as well as its neighbors in the South China Sea. The NDS pivot requires shifting focus from a largely asymmetric terrorist challenge to the threat from large, technologically advanced states. This requires the U.S. to rapidly modernize capabilities and investment in forces and posture. The Defense Industrial Base (DIB) has stepped up to this challenge, by supporting DoD with accelerated development and the production of new weapons and advanced technology. The bipartisan NDS Commission found that 3-5 percent real growth in defense funding was required to implement this NDS imperative.1 While this has been the strategy and consensus across two different administrations, the defense budget was not reflecting this recommended level of growth prior to the onset of inflation and is now paradoxically experiencing negative real growth. When combined with the effects from COVID-19, supply chain, and other workforce disruptions, DoD and the DIB are struggling to increase capacity and to achieve the pace of modernization required to maintain our technological advantage over these near peer competitors in order to deter further aggression. Congress has become increasingly concerned about these defense budget shortfalls and their impacts on modernization and the DIB.