The United States in the mid-1940s, the country had just financed the most expensive and bloody war in history. Something new is occurring: paychecks for the first time begin withholding income tax out of those paychecks as they are earned. The so called “Gold Standard” where Gold backs every dollar as a legal promise is gone for Americans. The Federal Reserve is learning how to steer interest rates for a peacetime economy. Beardsley Ruml, a former Macy’s finance chief turned New York Federal Reserve chair steps into this backdrop and writes an article in the January 1946 American Affairs publication with a simple but provocative statement:
“Taxes for revenue are obsolete.”
Beardsley Ruml
He isn’t trolling – he meant what he said. He’s telling readers that the way money works has changed, and if we keep thinking about Federal taxes like a family checking account, “first earn, then spend”, we misunderstand how money works in a fiat currency not backed by a hard asset (like gold) and what taxes actually do in a monetary system. The government no longer needs to wait for tax revenue to spend. Stop for a second and think about this statement, it is a Matrix like moment where Morpheus asks Neo if he wants the Red Pill or the Blue Pill. The Red Pill represents the truth and how fiat currency actually works, and the Blue Pill represents just ignoring the truth and going back to your comfortable understanding of how money works. A full copy of Ruml’s Thesis can be found here.
Fiat currency is money that is not backed by a physical commodity like gold or silver, but is instead backed by the government that issued it. Its value comes from the public’s trust and the government’s authority, which decrees it as legal tender. Examples of fiat currency include the U.S. Dollar, the European Union’s Euro, and the Japanese yen.
The Backdrop for Ruml’s Thesis
When Beardsley Ruml wrote “Taxes for Revenue Are Obsolete,” he was synthesizing his experiences of how American money actually worked, and the changes going on around him. As a Federal Reserve chair, participant in Bretton Woods, and someone who shaped policy, like Pay as you go payroll, he had a first hand view.
1933–1934: Off domestic gold—constraint shifts inside the border
In the early New Deal years, the U.S. ended domestic gold convertibility and reorganized the gold regime under the Gold Reserve Act. Inside the country, dollars were no longer legally IOUs for a fixed weight of metal. The binding constraint on federal finance began to migrate from gold reserves to inflation, real capacity, and statute (law). Ruml’s essay explicitly ties his thesis to this inconvertible-currency reality: a national state “with a central banking system… [whose] currency is not convertible into any commodity.” [1]
“Final freedom from the domestic money market exists… where [there is] a modern central bank, and [the] currency is… not convertible into gold.” [1]
1942–1943: Pay-as-you-go withholding—taxes become continuous
With wartime employment booming, Ruml helped push paycheck withholding (the Current Tax Payment Act of 1943), turning the income tax from an April settlement into a real-time flow. Withholding didn’t just improve administration; it made taxes a live instrument for managing purchasing power across the year, reinforcing Ruml’s view that taxes should be judged by effects—on prices, distribution, and behavior rather than as a cash bucket to “fund” future outlays (spending). [5]
1944–1946: Bretton Woods and the New York Fed vantage point
As Bretton Woods took shape (par exchange rates, gold convertibility for foreign official holders, capital controls), Ruml was chairman of the New York Fed (wartime through 1946). He watched the Fed support Treasury borrowing for war finance and then toward peacetime normalization. In that setting, Ruml saw operationally how Treasury spending settled through the Federal Reserve, and how taxes and bond sales later lowered purchasing power and supported interest-rate control. He previewed his thesis in a 1945 address and then published the 1946 essay, sharpening the claim that taxes are essential for what they do, not to generate revenue before spending. [1]
“All federal taxes must meet the test of public policy and practical effect.” [1]
1951: The Treasury–Fed Accord—roles clarified
Ruml’s essay was given before the Treasury–Fed Accord, but the Accord (1951) confirmed the institutional direction he was pointing toward: monetary-policy independence to target rates and prices, separate from Treasury’s debt-management imperatives. After pegging wartime yields, the Fed reclaimed the ability to resist fiscal pressure when inflation called for tighter settings—strengthening the case that budgets should be judged by employment, prices, and distribution, not balanced-budget rituals. [3]
Ruml died in 1960, but his logic became even more straightforward after Nixon suspended official dollar–gold convertibility and major currencies moved to floating exchange rates. From then on, the United States was unambiguously a fiat-currency issuer: spending cleared through the Fed first; taxes and bond sales followed to manage inflation, distribution, market structure, and interest rates. Ruml’s once-provocative line read less like heresy and more like a plain description of operations—with the real constraints now fully on inflation, capacity, and institutional credibility. [4]
“The public purpose… should never be obscured in a tax program under the mask of raising revenue.” [1]
So the events and experiences: moving internally away from gold backed assets at home (1933–34), real-time taxation (1943), Fed Monetary Autonomy (1951), and externally away from gold (1971–73) together explain how Ruml could say, without gimmicks, that taxes are essential for what they do: price stability, distribution, behavior, and currency demand—rather than as a prerequisite to spend. He believed the question for any program was:Can the real economy deliver, and how will policy manage the price-and-capacity path along the way?[1][3][4][5]
Follow the dollar: how “mark-up” works
To see understand Ruml’s Thesis more concretely, we can use by example a single payment.
A federal contractor finishes a bridge repair job. Treasury authorizes payment to the contractor. The Federal Reserve, which is the government’s bank, marks up the contractor’s checking account at their commercial bank. Two things happen at once:
The contractor’s deposit goes up (their balance goes up, they have more spendable money).
The contractor’s commercial bank’s reserve balance at the Fed goes up (the bank’s settlement cash).
No one at the IRS had to collect that exact amount yesterday for this payment to clear today. In other words, the government did not have to wait for revenue before spending. The payment clears because the United States operates the dollar system. Once that payment is made, taxes later can remove some of those dollars from private hands; and bond sales can swap some deposits/reserves for Treasury securities to help the Fed keep interest rates where it wants them.
That’s the basics of Ruml’s claim. In a fiat system with a central bank, spending isn’t bottlenecked by prior tax receipts. The real limits are inflation and real capacity – how many workers, machines, homes, kilowatts, and microchips the economy actually has.
“Federal taxes can be made to serve four principal purposes…” [1]
Ruml’s Four Functions for federal taxes then are as follows:
Price stability (control inflation by removing purchasing power when the economy runs hot)
Distribution (redistributing wealth (purchasing power) based on policy)
Behavior/structure (altering behavior with economic incentives e.g. carbon, tobacco, alcohol, etc.)
Currency demand/legitimacy (creating demand for currency by requiring Federal taxes be paid in Dollars)
Questions from Ruml’s thesis
Not only was Ruml’s thesis provocative, if true it brings up a whole set of new questions, and challenges a lot of our notions of money and taxes.
Question: If spending can come before tax revenue, and the government doesn’t need it to spend, why are we paying taxes at all? This is the heart of Ruml’s Thesis, that while the government did not need taxes to allow the government funding to spend, taxes did play an important role. Ruml believed taxes were a way to manage price stability (inflation): they help keep prices in check by reducing purchasing power (demand), they shape who holds purchasing power, and they anchor the currency by requiring dollars to settle tax bills. Without taxes, you could spend for a time but you would lose price stability and the public’s confidence in the stability of the dollar itself.
Question: Why do politicians still ask “How will you pay for it?” if taxes aren’t needed to spend? Because you hit walls long before you “run out of money”:
You can’t print money for Imports. If spending weakens the value of the dollar, import prices jump or supplies dry up. That impacts living standards fast. [18][19][20]
Boom–bust finance. Prolonged easy fiscal + easy money can inflate asset and credit bubbles; when they pop, banks retrench and recessions deepen—costlier than using modest drains (purchasing power reductions) earlier. [9]
Tax-base erosion (seigniorage limit). If people expect rising prices and weak policy response, they flee into hard assets/FX; real tax intake falls just when control is needed (seen in hyperinflations). [16][17]
Real-world choke points. Money doesn’t increase productivity, create nurses, build cars, ports, or grid lines; increasing demand into bottlenecks yields price instability, not output. [10][12][13][14]
Interest-cost feedback. Rate hikes to cool inflation raise government interest bills, shifting income toward bondholders and forcing tougher trade-offs later. [11][9]
Predictable Policy keep costs low. Predictable authorizing/phase-out rules lower risk and support long-term contracts; junk the rules and borrowing costs/investment worsen even before inflation moves. [11][9]
Ruml’s point isn’t spend in excess, it’s that taxes aren’t required to spend. Taxes and pacing are the governors that keep prices stable, protect access to vital imports, prevent financial bubbles, and align demand with what the real economy can actually deliver. [1][2][3][6][7]
Question: Why not just make everyone a billionaire? This is an interesting thought exercise, if everyone was a billionaire would the purchasing power of the currency be the same? Since money is a claim on real output, not actual output (productivity) if everyone was a billionaire most certainly the purchasing power of the fiat currency would be substantially lower. More money without more productivity (nurses, houses, energy, widgets, etc.) brings higher prices (inflation), not greater prosperity. Ruml’s thesis keeps taxes (and other monetary mechanisms to reduce purchasing power) in the toolkit precisely to match purchasing power to capacity.
Japan: Use Case and cautionary tale
Japan is the cleanest real-world test of part of Ruml’s thesis. For decades, Japan’s gross public debt sat well above 200% of GDP—yet long-term interest rates were near zero under Bank of Japan (BOJ) policy. The Yen has had no solvency crisis, of major uncontrolled inflation. That supports Ruml’s point that a nation which issues debt in its own currency faces inflation and capacity constraints more than a “running out of money” constraint [12][13].
However, during the same period shows why Ruml’s mechanics don’t solve the growth problem by themselves:
The “lost decades.” Japan endured a multi decade stretch of weak real growth and disinflation/deflation. Even with easy financing conditions Japan was not able to create growth and productivity improvements or new sectors on their own [14][16].
Balance-sheet hangover. After the 1990s asset bust, households and firms deleveraged for years—private demand stayed weak even when public deficits filled part of the gap.
Wages and demographics. An aging population, shrinking workforce, and corporate practices contributed to sluggish productivity and flat real wages for many workers [14][16].
Foreign Exchange (FX) and imported prices. Episodes of yen weakness raised import costs (notably energy), squeezing households and complicating the path out of very low inflation.
Policy evolution. The BOJ cycled through low rates including zero and even negative interest rates for 8 years!, Quantitative Easing, and yield-curve control, then gradual adjustments. These tools stabilized finance but didn’t create robust growth, reminding us that supply-side capacity (energy, housing, innovation, corporate reform) still determines living standards.
Monetary sovereignty may avoid immediate solvency issues in your own currency, but prosperity still depends on productivity, demographics, and the supply side. The policy art isn’t printing more money; it’s about managing the balance between demand and capacity so money meets output rather than outruns it. [12][14][16]
Where Ruml’s Thesis fails
Ruml presumes monetary sovereignty – you tax and spend in your own currency, with credible institutions, and you don’t owe large amounts in someone else’s money, or require external inputs like energy, food, or other goods and raw materials. It also assumes you don’t outspend the productive capacity of the country. If and when those conditions vanish, significant and detrimental impacts could fall upon the country. There are a number of examples of hyper inflation, that have damaged the economic and well being of countries.
Weimar Republic Germany (1921–23). Huge reparation obligations (external), political fracture, and aggressive central-bank financing into a collapsing anchor produced hyperinflation. The issue wasn’t “deficits” in the abstract; it was external liabilities + institutional breakdown + supply dislocation [18].
Zimbabwe (2000s). Radical output collapse (agriculture and supply chains), governance failures, and money creation against shrinking real capacity drove prices into hyperinflation. Too many nominal claims, too little real output [19].
Sri Lanka (2022). A foreign-currency crisis: depleted FX reserves, weak tax base, and large hard-currency debts. You cannot print your own fiat money when your liabilities are in dollars/euros; the constraint becomes imports and external financing, not domestic “solvency” [20][21][22].
Ruml’s Thesis exists when you issue your own currency, are not dependent on externalities or foreign debt, and spending does not outpace productive capacity and credibility in currency is maintained. Lose those – and inflation, devaluation, and/or default can take the driver’s seat.
How most Economists think about Ruml’s Thesis
Most modern economists agree on the operational basics: in a fiat currency system, the Treasury and central bank can ensure payments clear in the home currency; taxes/bonds then drain purchasing power and help the central bank hit an interest-rate target. That’s not controversial [6].
Where Economists caution starts – real life, not the textbook:
Prices can jump if demand outruns supply. If new spending hits an economy short on cars, nurses, chips, or houses, prices rise. That happened in 2020–22 during the COVID Pandemic: demand recovered while supply was jammed. Changing taxes or budgets is slow, so economists like built-in brakes (automatic stabilizers) and phased rollouts. [6][7][2]
Higher interest rates make debt cost more. The U.S. can always pay in dollars, but when the Fed hikes to fight inflation, the interest bill on government debt climbs. If that bill grows faster than the economy or tax revenue, Congress faces tougher trade-offs. Last year Net Interest on the US National Debt was over $1 trillion. The 1951 Accord exists so the Fed can fight inflation even if it makes borrowing costlier. [3][10][11]
Consumer Sentiment and Beliefs matter. Prices stay more stable when people trust leaders will cool inflation off if needed. If policy looks like “spend without limits,” businesses and workers build in higher inflation into their cost models and pass that along, and it’s harder to bring back down once its gone up.
Not every side effect shows up in the Consumer Price Index (CPI). Inflation can manifest itself in many ways that trickle down to the ordinary consumer in ways that aren’t tracked well by major indexes like the CPI. Big deficits with low rates can push up stock and house prices and widen wealth gaps, even if everyday inflation isn’t high. That can erode support for useful programs. [10]
At full tilt, something has to give. When the economy is already near full capacity, more public spending creates demand that competes with private demand for the same workers, resources, and materials. The result isn’t “no money”; it’s higher prices or shifting resources away from something else. This can be managed with taxes destroying demand, phased timing reducing demand peaks, or adding supply.
America, and most countries are deeply intwined in Global Trade We import energy, food, critical resources, and key parts from a Global Supply chain. If the dollar weakens or suppliers get nervous, import prices rise and shortages can appear. Building domestic capacity (energy, logistics, housing) and self sufficiency can offset that, but it also comes at a cost.
Where Economists actually stand on Ruml’s thesis
Broad agreement on the plumbing: Most economists accept that in a fiat system the government can pay first in its own currency, and that taxes/bonds are tools to manage demand and interest rates. That’s mainstream (see the Bank of England explainer). [6][7]
Support for using deficits in slumps: In recessions or emergencies, many economists favor deficit spending to protect jobs and speed recovery. (Ruml’s taxes aren’t required for spending fits this.) [6][7]
Caution about pushing it too far: Many are wary of treating “spend first” as a green light without a clear plan for inflation, ensuring demand doesn’t outpace supply and productive capacity, and the outside world (Global trade, key economic inputs from outside the U.S.). They stress guardrails, automatic stabilizers, and credible roles for the Fed and Congress (the spirit of the 1951 Accord). [3][10][11]
Split on the stronger claims (often linked to MMT):
Critics say relying mainly on taxes to stop inflation is too slow and political, and they worry about fiscal dominance (pressuring the Fed to accommodate debt). They also flag open-economy risks and asset-price side effects. [9]
Supporters respond that good design (automatic tax/benefit adjusters, phasing, targeted drains) can handle those issues, and that recognizing the fiat mechanics helps us focus on real limits (people, machines, energy) rather than imaginary cash limits. [9]
Economist View Summary:
They mostly agree on the mechanics.
They agree deficits can be useful tools.
They differ on how far you can push spending before you risk inflation, financial stress, or FX problems
They differ on whether taxes can be used quickly and fairly enough to cool inflation off. [6][7][3][10][11][9]
A Ruml-style way to judge any Spending program
The Congressional Budget Office estimates the cost and budget impact of programs. Using a Ruml Thesis style way to evaluate programs might look something like this.
Capacity: Do we have the people, skills, materials, energy, and productive capacity? If not, what’s the plan to expand supply?
Inflation plan: If demand overheats, what automatic brakes kick in—phasing, adjustable credits, temporary surtaxes? [2]
Distribution: Who gets the new purchasing power and who gives something up?
External exposure: Are we import or FX sensitive in the relevant inputs? Do we hold external exposures?
Institutional alignment: Are fiscal choices made with a central bank focused on price stability (the post-1951 lesson)? [3]
Summary: Ruml’s answer to the question
In summary we ask the title question: “Are taxes needed,?” Ruml’s answer—in his own words—is that their revenue role is not the point in a fiat system:
“Taxes for revenue are obsolete.” [1]
They are needed for what they do: to keep prices stable, shape distribution and behavior, and anchor demand for the dollar:
“Federal taxes can be made to serve four principal purposes…” [1]
And the standard for judging them is not myth or ritual but outcomes:
“All federal taxes must meet the test of public policy and practical effect.” [1]
Read that together and you have the summary of his thesis: the United States does not tax so that it can spend; it taxes so that the money it spends produces stable prices, fair distribution, incent certain behaviors, and ensure a credible currency. While his beliefs were provocative at the time, and still controversial, the mechanics of his thesis remain true and you can see his influences in the roots of Neo Chartalism, Functional Finance and all the way to Modern Monetary Theory (MMT) today.
Inflation is the silent force that eats away at your purchasing power every day. It does not sleep, it does not rest, it keeps coming all the time. It reduces the value of your savings, and eats at your pocketbook every time you buy something. For most Americans that word enters your household through price tags at the store, the rent due each month, or the spikes in utility, subscription, and insurance bills. Headlines tell different stories like “inflation is going through the roof” or “Inflation is easing”, sometimes at the same time! Yet, even when the rate slows, the prices remain higher than before, and individual experiences can diverge sharply from official reports. The news often comes with confusing terms like Headline Inflation, or Core Inflation and they discuss it in “nominal” and “real” terms or use acronyms like CPI and PCE. If you’re confused, you are NOT alone. This is the language used by Economists, Investment Bankers, and Central Bank figures that are looking to measure different parts of inflation, trying to be as accurate as possible. This article dives into those areas to help explain inflation metrics, so you can understand what is happening, why, and how each of these terms are used so hopefully you can make more informed decisions.
What is Inflation?
To help set a baseline for our discussion, lets define inflation. Here is how Webster’s Dictionary defines Inflation:
2 : a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services
In simple terms, inflation is an increase in the cost of goods and services. As prices increase, the purchasing power of your money decreases. When inflation is low and prices are stable that is thought to be good overall. It helps businesses stabilize labor costs, and lowers the value of debt. However, higher or more volatile inflation is something that negatively impacts everyone, and governments and central banks around the world pay close attention to inflation to order to manage it careful to ensure stable prices. Economist use a few different terms to describe why inflation is occurring.
Demand Pull – When there is high demand, and demand exceeds supply prices increase. You can see this effect in action around Christmas time when the latest game console, or in demand toy is hard to find and prices jump dramatically. Some of the causes:
Higher consumer demand and spending
Increased Money Supply
Government Spending
Cost Push – When the supply cost to produce goods and services increase suppliers pass these costs onto consumers. You saw this in the 70’s with the oil embargo, and during COVID with the supply chain issues. Some of the causes:
Higher Material Costs
Higher Wages/Labor Costs
Increased Taxes or Regulations
Disruptions in the Supply Chain
Why Inflation Feels Different Than the Headlines
When you watch the news and they say inflation is up, and they give a number or that it is dropping – if that feels different than what you are experiencing, you are not alone. Every person has their own lived reality, where you live, where you work, your life style, your spending mix (groceries, housing, gas, health care, etc.) are all different and they matter when it comes to how inflation is impacting you. Unsurprisingly, you are unique, and the challenge with metrics is that they attempt to capture large swaths of different areas that produce data that turn into macro metrics that are supposed to represent different groups that may have little to do with your unique situation. For example is you are an professional in finance or technology in an urban metro center than there maybe a higher likelihood of you being a closer match to the CPI Urban index (CPI-U) than someone in a Rural area in the Agriculture, or Manufacturing sector who may more closely track to the CPI Wage Earners and Clerical Workers (CPI-W) index.
Most recently in 2024 we had some significant increases in inflation in a short period. When inflation has a period of rapid rise like that, and then cools off and the rate of inflation slows, you are still at a higher price base than before even if the rate of inflation is lowering. It is little consolation when Politicians say inflation is lowering when costs have already risen and your wages haven’t kept up. So in part, the challenges with inflation are both a communication issue in how to empathize and understand someone’s individual experience with inflation and a technical one on how to capture that impact with metrics and data. This is not to say that the hard working and intelligent people capturing this data are wrong, these metrics are useful at capturing macro level changes over time that are helpful to guide decisions and course corrections for the nation overall. However, in the context of if they match your experience, sometimes for a great number of people, they often do not. In fact there are many articles and stories of exactly the same, and some groups have even created their own tracking that shows some of the disconnect and are worth further review. Here are a few terms to help you understand the inflation landscape, and what they mean.
Inflation Concepts
Headline vs. Core Inflation
When the News mentions inflation, it’s usually referring to “Headline” inflation – the total change in prices for all goods and services tracked by an index known as the Consumer Price Index or CPI. Sometimes they will differentiate and use the word “Core” inflation and this is the same as CPI except it excludes food and energy prices and is known as Core CPI. Why the need? Because those categories (food and energy) tend to have volatile pricing, and to understand the underlying trends of inflation as a whole Economists want to remove the noisy volatile part to see if everything else is rising or just the volatile components. Policymakers use Core inflation to judge long-term patterns, knowing that food and energy prices swing widely with supply shocks, global events, or weather.
Real vs. Nominal: The Dollars You See vs. Your True Buying Power
Two simple but critical terms you should know to help you understand inflation’s impact and how Policy and Economists discuss inflation: “Nominal” refers to the actual dollar amounts seen in your paychecks and bills. This is the non Inflation adjusted amount, and the prices you see every day. While “Real” means the dollars after adjusting for price changes, this is the Inflation adjusted amount. If your wages go up 4% but inflation rises by 3%, the Real increase in purchasing power is only 1%. Real Inflation indexes allow economists, government agencies, and citizens to compare the true value of money over time. For example the purchasing power of $1 in 1930 was the equivalent of $19.34 in 2025 dollars.
Seasonal vs Non Seasonally Adjusted
Similar to Real and Nominal, Seasonal and Non Seasonal are adjustments to the inflation data but are not made for the impact of inflation over periods of time but seasonally within a year due to different buying habits and supply differences each season. Non Seasonally Adjusted (NSA) inflation numbers are the raw numbers they do not adjust for inflation. If Gasoline prices are higher in summer because more people are driving, they do not adjust them. Similarly if fresh produce food prices drop in summer because of abundant supply during the summer months, or if energy prices increase during winter when more people are consuming for heat they do not adjust. Seasonally Adjusted (SA) inflation prices are adjusted, and statistical methods are used try to smooth out and normalize these seasonal difference. This is the number used by most economist and policy makers as it gives a more stable reading of inflation without seasonality.
Chained vs Fixed (Unchained) Weighting
Chained and Fixed Weighting are both methods to capture inflation but they differ in how they measure consumer behavior when prices change. Specifically the substitution effect, or when the price changes does user behavior change with it or does it stay the same and the answer to that question determines the weighting. For example, if beef prices rose dramatically it is reasonable to assume that there maybe some consumer behavior shifts causing some to substitute chicken versus beef. Chained Weighting would evaluate that type of change and not overweight beef, and capture the change in consumer behavior. On the other hand Fixed Weighting remains the same, and does take into account possible changes in user behavior.
Inflation Metrics
One of the most confusing parts of inflation is how it is measured and tracked, not just the terminology but also the fact that there are so many different ways to measure and track it. When you someone mentions inflation they are probably talking about Headline inflation, but not always and these terms are thrown around all the time in different contexts. In the United States there are over a dozen different metrics tracking different forms of inflation. Fortunately, we’re going to help break it all down for you – we’ll discuss each of the individual metrics, and the groupings and who produces them and what they represent. To start the most prevalent metrics in use for inflation are from the U.S. Government, and they primarily come from 2 agencies. The first is the Bureau of Labor and Statistics (BLS) an agency within the Department of Labor. They produce the most common metric known as the Consumer Price Index (CPI) known as the “Headline” inflation metric. The other major agency is the Bureau of Economic Analysis (BEA) an agency within the Department of Commerce. They produce the Personal Consumption Expenditures (PCE) metrics, often used by other agencies like the Federal Reserve. Each of these major metrics (CPI and PCE) has groups of related metrics that provide different variations to help Economists understand the nature of inflation from different angles. Here are the major groupings:
CPI (Consumer Price Index): The CPI grouping of metrics is calculated by the Bureau of Labor Statistics (BLS), the index tracks the cost of a fixed basket of goods and services bought by urban households. There are a few versions of CPI, but when someone says CPI generically, or Headline inflation, or just Inflation they usually are using CPI-U which is for all urban consumers; There is another metric that tracks urban Wager Earners & Clerical workers called CPI-W is used to adjust Social Security payments. It is a subset of CPI-U that tracks the price changes specific to those who work in clerical, sales, craft, service, or other blue-collar occupations. They are not salaried professionals, managers, or self-employed. This was originally created in the early 19th century to track industrial workers.
CPI Methodology
Direct costs – focus on out of pocket, direct expenses
Fixed Basket – constant weighting of basket of goods over 2 years
Collection Method: Household survey
PCE (Personal Consumption Expenditures): This index, preferred by the Federal Reserve, is managed by the Bureau of Economic Analysis (BEA). It covers direct and indirect expenses (like employer-paid health insurance), updates spending patterns more frequently, and uses “chain-weighting” to reflect how buyers substitute when prices shift. Because of this dynamic approach, and that it captures more of the cost it is the reason why the Fed uses it to more accurately model people’s behavior.
PCE Methodology
Direct & Indirect costs – capture out of pocket costs and other employer paid expenses like Medicare.
Chained Weighting – adjust the basket of good to weight for changing consumer habits. If beef prices go up and people substitute chicken, PCE captures the shift in behavior and does not overweight beef.
Collection Method: Business survey
Producer Price Index (PPI): This index tracks prices received by businesses for their output, not what consumers pay, but what companies charge producers (Business to Business). This measures what business pay for supplies wholesale before the retail/consumer market. Often called the “Factory Gate” Index because it measures the cost inputs for supplies to business before they are distributed to consumers. This is often considered a leading indicator as PPI often shows price pressure before reaching consumers.
GDP Price Index & Gross Domestic Purchases Index:
GDP Price Index measures inflation by capturing changes in the prices of all goods and services produced within the United States, including exports but excluding imports. It reflects the cost of production and output of the national economy, helping assess real economic growth by adjusting for inflation by what the country produces.
Gross Domestic Purchases Price Index measures the prices of all goods and services purchased by U.S. residents, including imports but excluding exports. It provides a broader view of inflation from the perspective of what Americans actually buy, capturing price changes in domestic and foreign goods and services consumed within the country.
Types of Inflation Metrics
This table provides a summary of the different Inflation metrics in the US (there are many more, but these are the primary). Importantly, it gives a description of what it is used for and what it covers. It has a description of the products that are covered (often called the basket of good) and how it is weighted (The percentage amount of each category in the metric). From this you can get a better sense of how the metrics are derived, and which impact you most, and how they might changed based on different inputs.
Who
Date
Index
Index Name
Description
Used For
# of Products
How it is weighted
BLS
1978
CPI-U
Consumer Price Index for All Urban Consumers
Price change for a fixed basket of goods & services purchased by urban consumers (~93% of U.S. population).
Headline inflation, Index of Private Contracts/Leases, Treasury TIPs, Federal Poverty level used by Census, some States index for minimum wage
CPI excluding food & energy to view underlying trend.
Used to track the underlying inflation trend by excluding food and energy, helping the Fed and analysts assess persistent inflation for policy and forecasting.
Prices received by domestic producers for output (goods, services, construction).
Tracks the prices businesses receive for goods and services; used to gauge upstream inflation and input cost pressures, set index-linked contract adjustments, and help forecast consumer price trends.
Prices for all goods & services purchased by/for U.S. households (national accounts).
The inflation measure the Fed watches most; it shows how fast household prices are rising and is used to strip inflation out of consumer spending numbers.
The Fed’s main gauge of underlying inflation, excluding food and energy, to judge persistent price pressures and guide interest rate decisions; also used to strip inflation out of consumer spending data.
PCE price index excluding most estimated components; uses observed market transactions.
A version of PCE that uses only actual transaction prices and leaves out items with only estimated prices. Used as a cleaner cross-check on inflation and for clearer inflation-adjusted spending.
For detailed information on the basket of goods and their weightings in CPI, or PCE expenditure breakdowns in more detail see these.
BLS Relative Importance Tables (CPI Category Weights): https://www.bls.gov/cpi/tables/relative-importance/ This page provides detailed tables showing the relative importance (weight) of CPI components for various CPI versions.
Consumer Price Index (CPI-U) and Core Consumer Price Index (Core CPI)
Personal Consumption Expenditures (PCE) and Core Personal Consumption Expenditures (Core PCE)
Who Uses Which Index and Why?
Our Government and various organizations use different metrics for various components that effect American’s everyday lives. Here is a cheat sheet of who uses what?
Who
What they use it for
News Agencies and Media
CPI and CPI-U – Headline inflation number to report on Inflation to public
Social Security
Uses CPI-W for annual cost-of-living adjustments, matching legislation to beneficiary spending patterns.
Tax Code
Federal income tax brackets and thresholds are updated using chained CPI-U to keep pace with inflation over time.
Federal Reserve
Targets core PCE inflation for monetary policy. The Chain Weighted basket of goods more closely mimics consumer behavior and includes both direct and indirect inputs.
Treasury
The Treasury offers inflation protected securities (TIPs and I Bonds) that use non seasonally adjusted CPI-U for inflation adjustments. Understanding this rate can help you evaluate your securities.
US Census
The Census uses CPI-U to update poverty thresholds annually.
National Economic Accounts
Use PCE and GDP deflators to convert raw dollar figures into inflation-adjusted series.
Table 2 Agency Use Cases
How to Pick the Right Index for Your Situation
Here is a cheat sheet of how to use the different metrics and which one might be appropriate for what you are trying to understand.
Your Interest
Metric
Descripton
Your expenses and wages against inflation
CPI-U
If tracking personal expenses or comparing wages/paychecks against inflation, CPI-U is the most direct yardstick.
Your expenses and wages against inflation for industrial, non salaried work
CPI-W
CPI-W more closes tracks expenses for non salaried, non managerial positions.
Social Security COLA adjustments
CPI-W
For retirees, Social Security COLA is based on CPI-W and may differ from personal cost patterns.
Small Business Planning
CPI-U and PPI
Small businesses should compare CPI-U for their costs and PPI for their sales prices.
Landlord, Property Owners for Leases
CPI-U and CPI-W
Landlords or contract writers use CPI-U or CPI-W, depending on their lease or agreement.
Financial Planning
PCE
For financial planning, PCE is preferred for broad purchasing power trends.
Table 3 Personal Inflation Cheat Sheet
Why Multiple Indexes?
No single metric can capture the full range of price changes, consumer habits, and economic shifts. CPI is best for consistent, out-of-pocket price trends. PCE adapts to the complexity of actual consumer behavior, including employer and government paid expenses. PPI shows upstream price pressures from Producers that may end up in Consumer prices via Cost Push inflation. GDP-related indexes help economists and forecasters look at the big picture to understand real Growth versus Inflation. Each is used for decisions that would be ill-served by a “one index fits all” approach.
Summary
Inflation, the terms, the metrics, and way it is discussed and used can be a lot to take in. Hopefully you have a better understanding of the metrics, and how do make sense of them. Knowing that what you feel and what is being reported in the news can and often are different and that is normal even if if it doesn’t make you feel like it represents you. Hopefully you have a better understanding and can recognize which metric is being cited, understanding how it is calculated, and if it is the best for your situation. You should now be able to read inflation news and be able to think critically and understand if it is accurately representing your current economic situation and the country as a whole.
Imagine running your household. You earn money (income), spend on essentials (expenses), and sometimes need to borrow for bigger purchases (debt) that exceed your income or savings. The national debt is similar, but on a much larger scale, affecting the entire country. While it is not the same as the US has some other unique features that allow it to potentially borrow more, it acts in the same way.
What is it?
The National Debt is simply the total amount of money the US government owes. It accumulates whenever the government spends more than it collects in taxes and other revenue. It is like using a credit card – convenient in the short term, but the bill comes due eventually and like a credit card the Government must pay interest on the debt in the form of Interest payments, often referred to as Debt service.
Who manages it?
Several key players manage the National Debt:
The Treasury Department1: They issue debt instruments like Treasury bills, notes, and bonds, borrowing money from investors to raise money “credit” for the Government.
The Federal Reserve: They play a role in managing interest rates, which affect the cost of borrowing for the government. They set a key borrowing rate known as the Fed Funds rate at which other banks’ rates are set against. As interest rates rise, so does the expense of service the debt, much like credit card companies raising the interest rates for your credit.
Congress: They authorize the government to spend and borrow money, responsible for managing the debt. Congress holds the purse strings on spending by authorizing spending bills and setting the Debt limit with authorized Debt ceilings.
Who does what?
Several independent agencies track the National Debt:
Government Accountability Office (GAO): They audit the government’s financial statements and report on the debt.
Congressional Budget Office (CBO): They provide economic forecasts and analyze the impact of debt on the budget.
Bureau of the Fiscal Service: They manage the day-to-day operations of the national debt.
Executive (President of the United States): The President sets the Fiscal Policy, Priorities, and Plan for the budget.
Office of Management and Budget (OMB): They help prepare the President’s budget, manage the Execution once Congress has approved the budget, and manage the oversight and performance management of the budget.
How does it grow or shrink?
Debt grows when the government spends more than it takes in. This can happen through various scenarios:
Fiscal Policy: When the President’s Fiscal Policy spends (intentionally or unintentionally) more than the taxes and revenue collected.
Tax cuts: When taxes are lowered and not offset by the Economic growth from the tax cuts.
Increased spending: More money on programs like entitlements including Social Security and Medicare or discretionary items like national defense, infrastructure programs add to the debt.
Economic downturns: When the economy shrinks, tax revenue falls, and the government chooses to borrow to stimulate it instead of reducing spending.
Exogenous events: Events like the 2008 Financial Crisis, Wars, or the COVID Pandemic can lead to debt spending to address.
The debt shrinks when the government collects more revenue than it spends or through strategic debt payments. Many of these are possible but often not used as they can be politically risky.
Government Spending Cuts: The Government can reduce spending by cutting or reducing programs.
Increased Taxes: The Government can increase taxes, although the long-term effects are mixed potentially reducing long-term growth which also impacts taxes collected.
Economic Growth: While not shrinking the debt, as the Economy grows more taxes are collected. If expenses remain the same, growth will reduce the ratio of expenses to revenue, effectively shrinking the budget.
Where does it fit in with spending and policy?
Fiscal policy is set by the President and refers to how the government manages its spending and taxes. It is a balancing act: providing essential services while keeping the debt under control. Like household credit it must be balanced with the benefits of immediate spending versus the challenges of paying items back later knowing that for every dollar you put on credit you will be reducing your available money to spend because a portion of your income will now go to credit card fees.
“If you choose not to decide, you still have made a choice”
Freewill performed by Rush
Historical context
The National Debt started during the Revolutionary War to finance the fight for US Independence. Since then, it has fluctuated based on several factors like wars, economic recessions, and government priorities.
How is it authorized?
Congress authorizes the government to borrow money by passing legislation, setting limits on the amount of debt allowed, known as the Debt Ceiling. From time to time this limit must be authorized to expand the Debt Ceiling to enable more debt to pay government bills.
The Future?
The National Debt is a complex issue with no easy solutions. Balancing competing priorities, managing interest payments, and ensuring long-term economic stability are key challenges. While there is no magic bullet, responsible fiscal policy, public understanding, and informed debate are crucial for navigating the complexities of the National Debt. The debt burden and interest on the National Debt are very real and left unmanaged can lead to negative consequences to the Economy and our Country.
The US Economy, measured by its Gross Domestic Product (GDP), represents the total value of all goods and services produced within a year. However, looming over this economic output is the ever-growing shadow of National Debt, raising concerns about sustainability and future generations. This article delves into the comparison between these two figures, explores how recent events impacted them, and examines the challenges posed by a large National Debt exceeding the size of the US Economy.
The National Debt of the United States has been steadily climbing, driven by several factors including fiscal policy, increased spending, and economic downturns. The COVID pandemic significantly accelerated this trend, adding over $7 trillion to the debt, while the roots run deeper. The Great Recession of 2008 also played a major role, pushing the debt-to-GDP ratio above 60% for the first time since World War II. As of Valentines Day 2024, the US National Debt stands at a staggering $34.3 trillion, that’s 34 x 10(12), exceeding 125% of the country’s GDP1.
Inflationary Dance with Debt
This high debt burden intersects with another economic concern: inflation. Increased spending and money supply expansion are often cited as contributing factors to inflation. In 2023, the US experienced inflation rates not seen in decades, exceeding 9% at one point2. While complex and multifaceted, the correlation between debt, money supply, and inflation cannot be ignored3. As Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” Growth in money supply does not automatically mean inflation, but if it outpaces productivity, inflation often follows.
“Only when the tide goes out do you discover who’s been swimming naked.” 4
Warren Buffet
Sustainability Concerns and Interest Bite
Beyond inflation, a ballooning debt raises concerns about its long-term impact. Servicing the debt consumes an increasingly larger portion of the federal budget, diverting resources from crucial areas. The interest on our debt in 2023 reached $659 billion dollars4, to put that in perspective there are less than 40 countries in the World whose entire economy is greater than the interest alone we are paying on our debt5. As interest rates rise, often seen during periods when the Federal Reserve is combatting inflation, interest payments balloon exacerbating the challenge of pay down the debt. Additionally, a high debt can weaken investor confidence, potentially leading to higher borrowing costs and hampering economic growth6.7
“I have yet to see a time when it made sense to bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”
Warren Buffett
Balancing Act and Looking Ahead
Managing the national debt requires a delicate balancing act. Reducing spending can be politically unpopular, and raising taxes carries economic risks. Meanwhile, relying solely on economic growth for debt reduction is an uncertain strategy. Finding a sustainable path forward necessitates responsible fiscal policy (spending within our means) and bipartisan cooperation, both of which remain elusive in the current political climate.
However, as Warren Buffett has bullishly stated: “I have yet to see a time when it made sense to bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.”
While expressing confidence in the long-term potential of the US economy, acknowledging the need for responsible debt management remains crucial.
Tax Project Institute is a fiscally sponsored project of MarinLink, a California non-profit corporation exempt from federal tax under section 501(c)(3) of the Internal Revenue Service #20-0879422.
