Inflation adjustments for defense acquisition

Abstract

This paper describes recent research on cost indexes by the Institute for Defense Analyses. It was performed at the request of the Cost Assessment and Program Evaluation directorate in the Office of the Secretary of Defense to assist in meeting the requirement in the 2009 Weapon Systems Acquisition Reform Act to assess and update the cost deflators the Defense Department uses to adjust for price growth in costing and budgeting major systems. The paper’s focus is on aircraft procurement. The research analyzes deflator algorithms and data to determine the source of the wide differences in aircraft cost growth rates calculated by (a) the Gross Domestic Product deflator for the entire US market basket of goods and services, (b) the national defense index for military aircraft published by the Bureau of Economic Analysis, and (c) the Producer Price Index for civilian aircraft published by the Bureau of Labor Statistics. The study demonstrates an alternative hedonic approach for calculating price indexes by using regression analysis to relate aircraft investment cost to the aircraft’s specific physical and operational design features such as weight and speed.