Eighty-two percent of Americans say that price increases are their biggest source of financial stress, according to a recent Financial Times–Michigan Ross poll. Only 14 percent, meantime, say that they are better off financially since President Joe Biden took office. Yet new data from the Federal Reserve’s Survey of Consumer Finances show that median household net worth grew 37 percent between 2019 and 2022, reaching the survey’s historical high. These seemingly contradictory data have commentators struggling to explain why strong wealth growth hasn’t translated into strong poll ratings for the president.

A new NBER working paper from Edward Wolff digs into the complex dynamics between inflation and wealth and helps resolve the paradox. While Wolff’s analysis is based on household data from 1983 to 2019, it is useful for understanding the popular reaction to the recent burst of high inflation.

Wolff’s results show that the “inflation tax”—defined as the difference between the nominal and real growth in income—falls unevenly across the rich, the middle class, and the working class because of differences in their asset composition. Some households near the median and at the top of the wealth distribution see a net benefit from inflation, while those with low wealth miss out on any opportunities to offset inflation’s costs.

>>> Bidenomics Has Taken a Big Bite out of Your Retirement

Wolff tracks a new measure called net inflation gain, which divides household assets and liabilities between those that fall in value and those that rise in value due to inflation. Household assets that fall in value include wages, salaries, and other income sources set in dollar amounts. When the value of the dollar goes down, the real purchasing power of those income streams drops. That fall in value also hits liquid assets, which are short-term savings for upcoming spending. The drop in purchasing power is the most visible and recognizable effect of inflation.

Household assets that rise in value include real estate and business equity. The flip side of the dollar’s drop in value is that the same real assets can be sold for more dollars. That counts for businesses that produce real goods and services, and for the equity owners who get profits from those businesses. Households that own stock indirectly through mutual funds and pension plans benefit from this dynamic, as well.

Household debts that fall in value include student loans, mortgages, and consumer debt. When the dollar declines, debts with fixed dollar amounts are repaid in dollars that are worth less and thus cost the household less. Whether a household considers inflation a net positive or a net negative, therefore, depends on its net asset position, itself largely dependent on income.

Think about moving up the wealth distribution in four stages. At the first stage are those with low incomes and low net worth, who spend everything they make while taking on small amounts of debt and assets. To the extent that such households have assets, they are mostly cash.

In the second stage, the move to the middle class, households have sufficient income to take on larger debt to start building assets. Wealth here consists primarily of residential real estate. The middle three quintiles of the wealth distribution have 64 percent of their assets in their principal residences, financed by debt worth 28 percent of their assets.

Holding that high leverage is a calculated risk, though, so as households move to the third wealth stage, they pay down their debts and reduce leverage. While the middle three quintiles carry total debt worth 36 percent of assets, those between the 80th and 99th percentiles carry debt worth only 9 percent of assets.

At the highest levels of income and wealth, households start to accumulate significant assets without debt. The top 1 percent holds about 75 percent of its assets in stocks, securities, and unincorporated business equity, while carrying debt worth only 2 percent of assets.

The difference in the composition of assets across the wealth distribution creates an uneven net inflation effect. The inflation tax behaves as you might expect, increasing with each move to a higher wealth bracket. The inflation gain, on the other hand, displays an irregular pattern. Wolff shows that households in the bottom two quintiles gained little from inflation and suffered a net loss, but that Americans between the 40th and 80th percentiles benefitted, and the middle quintile experienced the most pronounced gain. With an inflation gain of $72,400 and a loss of $32,600, the middle quintile netted nearly $40,000 from inflation during the 1983–2019 period. The middle quintile sees this net inflation gain because of its high leverage: it owns assets that appreciate with inflation, financed by debt that depreciates with inflation. Households between the 80th and 99th percentiles, however, have less relative debt and thus were harmed on net by inflation.

But examining the top quintile reveals another interesting wrinkle: the top 1 percent of households had a net inflation gain of $63,400. So, while inflation saps the value of income and liquid savings, past a certain threshold of assets a household can become a net beneficiary from inflation.

>>> How Inflation Changes Our Spending Habits

The calculation of net inflation gain shows the power of real assets as a hedge against inflation. Unfortunately, many in the bottom two-fifths of the population haven’t earned enough to accumulate real assets and take shelter from the inflation tax.

The dynamics of net inflation gain help to explain the reaction to Bidenomics. While some in the middle class have happily watched the real value of their mortgages and student loans fall while their home values have risen, those on more modest incomes trying to stretch paychecks to afford rent, gas, and food see no silver lining. Inflation worsens the gap between the working class and the middle class.

Wolff’s working paper illustrates why more Americans need to start building wealth through owning capital assets. The housing market is more important than the stock market at the first rung of the wealth ladder because houses have relatively stable values and make good collateral for first-time borrowers. Ensuring a good supply of starter homes will help more Americans build assets and find protection from inflation.

Moreover, Wolff’s analysis shows the problems that arise when the government uses inflation to pay for spending beyond its tax revenue. The inflation tax distorts asset markets, revises the value of written contracts, and eats away at the real value of liquid savings. Accounting for these undesirable interactions shows that inflation hits poorest Americans the hardest, acting as a silent tax on those least able to pay it.