The bottom 50% of Americans are building wealth even as inflation bites

In an eight-minute speech last week that sent stock markets tumbling, Federal Reserve Chair Jerome Powell echoed what he's said before about the importance of containing surging consumer prices: "The burdens of high inflation fall heaviest on those who are least able to bear them."

Yet data filtered through the Realtime Inequality tracker provide a nuanced picture of how the bottom 50% of U.S. households are faring in today's economy. The group, generally those with a net worth of $166,000 or less before the pandemic, are in the strongest relative financial position in a generation.

The group's collective inflation-adjusted wealth grew by 2.8% through the first six months of the year, according to the tracker, developed by three economists at the University of California, Berkeley. By contrast, those in the middle 40% were down 4.9%, while the top 1% — more heavily exposed to the bear market in stocks — lost more than 10%.

America's working class has been buoyed by outsized wage gains in one of the tightest labor markets in decades. Incomes among the bottom 50%, adjusted for inflation, increased by 1.3% in the first half of 2022, while those for the middle 40% fell by 0.2%. Since April 2020, real income growth for the lower half of the U.S., at about 45%, has roughly doubled the pace nationwide.

"The remarkable trend observed since the beginning of the COVID recovery — sustained growth for the working class, breaking with decades of income stagnation — is continuing," Gabriel Zucman, one of the economists who developed Realtime Inequality, said in an email. "Although the overall economy is slowing down, it is still delivering large, inflation-adjusted gains for the working class." 

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Still, the recent gains have only made a dent in broader inequality. The bottom 50% of Americans account for just 1.2% of the country's total wealth. The top 1% controls about 35% — a share that has mostly trended upward over the past four decades.

And with recession fears growing, stocks sliding and the housing market cooling, 2022 has been difficult for many Americans.

For one, the country's retirement crisis is only getting worse. This year's market turmoil erased some $3.4 trillion from 401(k)s and IRAs in the first half, according to Alicia Munnell, director of Boston College's Center for Retirement Research.

Meanwhile, consumers across the board are turning more to credit cards to keep up their spending, adding $46 billion to balances in the second quarter of 2022. The 13% year-over-year increase was the largest jump in credit card debt in 20 years, according to a study from the New York Fed.

In addition to seeing nearly no income growth in the second quarter of 2022, the U.S. middle class is also being struck by a slowdown in real estate. With the housing market careening to a halt, Moody's Analytics Chief Economist Mark Zandi told Fortune that he predicts home prices will fall by as much as 5% in the coming year and up to 10% if the country enters a recession.

That makes wage gains a more crucial component of a household's wealth growth so far this year, benefiting those who have taken advantage of the hot labor market. 

"The people in the bottom half and low-wage workers saw the most gains — the ones that have switched jobs in the lower end of the market have gained even more," said John Robertson, a Fed economist who manages the Atlanta Fed Wage Growth Tracker.