As the military looks to fulfill outstanding contracts for planes, ships and other vehicles, rising costs of production due to inflation will have a negative impact on the buying power of the military.
Inflation has gone up over the past few months, as the Russian invasion of Ukraine and strong consumer demand have caused consumer prices to go up. The consumer price index, a measure of the price of everyday goods, increased by 8.3% in April from a year ago.
A number of shortages in products such as microchips and baby formula have kept prices high because of the price increases in products of every kind, from tech to gas and everything in between.
The military is not immune to the rigorous testing process, as the fighter jets and submarines deployed by U.S. forces may be complex, but the parts they use are quite common, even if they go through a more rigorous testing process.
Phillips explained that the commercial off-the- shelf items that we put on our military vehicles are some of the things you're using in the military. The tires they're making for a Humvee are manufactured in the same factory where we're building Goodyear tires for a Ford F-150 - the same thing with brakes and other ancillary parts. He said that just because you're making the military radio doesn't mean that you're using some special parts. They have to be manufactured to build specs, but you're using the same innards. Inflation may not show immediate impact because projects take years to complete. The procurement of some Navy vessels takes up to a decade to complete, so those projects already in motion will proceed as planned.
In some cases, contracts for those vehicles will include provisions that cover increased production costs, giving the government the ability to renegotiate in some cases or to shift targets to prevent the contractors from suffering too much.
Phillips believes that the military can't spend money on future projects because of the legal requirement to complete those contracts. If the military could offer a contract of $500 million for five F-15 EXs, the cost of inflation may be reduced to three jets for the same bulk cost in order to cover the higher cost of procurement.
Phillips said the Navy may decommission some relatively young ships to make room for newer vessels due to the cost of maintaining the fleet.
If you wanted to keep 100, you may have to retire 25 because the budget is the same, so you can't keep 100, he said. You can only maintain 75 but the same budget.