A Note on Bias in DOD Inflation Forecasts

The importance of accurate estimates of inflation to the DOD is enormous. The end of the cold war marked the beginning of a “cost war” for the DOD. According to the GAO (1994, 1996), pressure to cut billions from the defense budget may encourage overly optimistic estimates of inflation that could lead to budgetary shortfalls, funding instability, and reduced military capabilities. The GAO and others have asserted that DOD inflation estimates are downwardly biased. We test this assertion by examining historical DOD forecasts against actual inflation as measured by the Gross National Product Implicit Price Deflator from 1979 to 1996. Based on the Wilcoxon signed-ranks test, results indicate significant upward bias in near-term projections, and no bias in projections spanning 2–5 years.