Joe Biden
President Joe Biden speaks during a meeting with private sector CEOs about the economy in the State Dining Room of the White House in Washington, Wednesday, January 26, 2022. (AP Photo/Andrew Harnik)

According to conventional wisdom, inflation has left most Americans poorer. It’s an odd view, given that the number of people with jobs jumped by 4.7 percent in 2021, and the economy grew by 5.7 percent after inflation. It was the U.S. economy’s best performance in decades. If people are poorer, why did household spending jump by 8.8 percent in 2021, after inflation, including increases of 25.8 percent for clothing and shoes and 11.6 percent for home furnishings? 

The reason the conventional wisdom doesn’t seem right is because it’s wrong: The incomes of most Americans, adjusted for inflation, increased in 2021. The government checks sent out in March 2021 and the soaring stock market helped. Wages and salaries also gained ground after inflation. And in a turnabout from the past several decades, the greatest gains in both incomes and wealth went to lower-income and less-educated Americans in 2021. 

How can the current meme be so wrong? Many people’s views of inflation are colored by the big jump in prices in the fourth quarter of 2021, when they spiked at an annual rate of 6.9 percent, according to the Bureau of Economic Analysis. But the annual rate for one quarter is roughly equivalent to one-fourth of the actual rate for the quarter, or 1.725 percent in the fourth quarter of 2021. Throughout the year, prices rose significantly but less dramatically—by 4.2 percent overall and 3.9 percent for the goods and services that people purchased. 

Conventional wisdom-mongers such as GOP leaders and Trumpist commentators are eager to throw shade on an economic boom under a Democratic president and Congress. And many people who feel the sticker shock when they fill their gas tanks these days believe it too, especially since many nonpolitical media didn’t check the data before pushing the meme.

CNBC compared the annualized inflation rate for the single month of December to annual wage gains and concluded, wrongly, that “despite higher wages, inflation gave the average worker a 2.4% pay cut.” Even The New York Times claimed recently that “there’s almost no question that wages, in the aggregate, have risen less than inflation over the past year.” In the aggregate, as we will see, wages increased by 4.7 percent after inflation 

Conventional wisdom that’s wrong can move people who don’t know the facts. A recent national survey by Navigator Research found that people’s positive views of the economy jumped from 27 percent to 44 percent when they were told the topline GDP and job growth numbers. Even among Republicans, those facts narrowed the gap between negative and positive views of the economy by 18 percentage points. And while most Americans’ views of the economy rely on what they’re told, they know their own economic conditions firsthand. According to Gallup, 59 percent of Americans say they’re better off or the same as a year ago, and 60 percent expect to be better off a year from now—but only 33 percent say they’re satisfied with the state of the economy. 

So inflation is a fact—but the notion that it has overwhelmed incomes is not. The Bureau of Economic Analysis reports that after inflation, the disposable incomes of all Americans grew by $608 billion in 2021, or 2.1 percent; on a per capita basis, it increased by 1.7 percent, or $775 per American. The wages, salaries, and benefits that Americans earned last year increased even faster, rising by 4.1 percent after inflation; setting aside the benefits, wage and salary income jumped by 4.7 percent. 

Granted, the disposable-income numbers include the government checks sent out last year. The wage and salary numbers include the additional earnings of 6.7 million people who found employment in 2021. So it is arithmetically possible that the inflation-adjusted earnings of most people could decline even as the overall measures increased. But that is not what happened.

The Bureau of Labor Statistics reports the usual weekly wage and salary income of full-time workers for each quarter by education and income groups—the bottom 25 percent, the second and third 25 percent, and the top 10 percent. The BLS does not issue that data adjusted for inflation, so I applied the Bureau of Economic Analysis’s inflation adjustment for 2021 to weekly wages and salaries in the fourth quarter of 2020 and compared the results to the fourth quarter of 2021. 

Consistent with the 2021 boom, the weekly wages and salaries of most Americans did not decline after inflation. Moreover, the distribution changed. People who earned less generally made more progress than those who earned more. Adjusted for inflation, the weekly earnings of men increased by 2.8 percent for those in the bottom quartile, remained steady in the second and third quartiles, and rose by 2.5 percent for those in the top 10 percent. Among women, those weekly earnings jumped by 3.2 percent in the bottom quartile and remained generally steady in the other quartiles and the top 10 percent. 

Among high school graduates, inflation-adjusted weekly earnings increased by 4.3 percent for those in the bottom quartile and 2.4 percent for the second quartile, remained steady for the third quartile, and rose by 3.2 percent for the top 10 percent. The income of college graduates rose more slowly, but in a similar pattern: Their weekly earnings rose by 2.3 percent for those in the bottom quartile and 1.3 percent for the second quartile, remained steady in the third quartile, and fell by 3 percent for the top 10 percent.

Analysts using different data and approaches report even rosier results. Three experts on inequality at the University of California at Berkeley, for example, found that national income per adult adjusted for inflation increased by 11.7 percent for those in bottom half and 7.6 percent overall in 2021. 

Perhaps most striking, the boom has produced a similar dynamic in people’s wealth. Those with less are making the most headway. The Federal Reserve reports that the total assets of the 40 percent of households with the lowest incomes grew by 11.1 percent over the first three quarters of 2021, nearly double the 5.7 percent gains by the next 40 percent of households and the 6 percent gains for the top 20 percent. 

One reason is real estate. While the inflation is slamming renters, 64 percent of Americans own their houses or apartments, and those values jumped by 15.7 percent from January to November 2021, or nearly 12 percent after inflation. And while 52 percent of household with below-median incomes are homeowners—compared to 79 percent of those above median income—real estate represents a much larger share of the wealth and assets of lower-income households. 

Savings are also part of people’s wealth, and the government checks in December 2020 and March 2021 drove up them up. The resolve by many Americans in lower-paying jobs to demand a better shake is also a factor. Perhaps the best news from the pandemic is that the conventional wisdom about the intractability of economic inequality may be wrong.

People are justified in being upset about rising costs, and the press has every right to report on them. But the claim that inflation wiped out income and wage gains in 2021 is not true. It won’t be true for 2022, either, if inflation begins to recede in the spring, as many economists expect. Voters might even confound conventional wisdom by rewarding Democrats for these good economic times. 

Robert J. Shapiro

Follow Robert on Twitter @robshapiro. Robert J. Shapiro, a Washington Monthly contributing writer, is the chairman of Sonecon and a Senior Fellow at the McDonough School of Business at Georgetown University. He previously served as Under Secretary of Commerce for Economic Affairs under Bill Clinton and advised senior members of the Obama administration on economic policy.