Inflation Exacts its Pound of Flesh: How Americans Earned their Income from All Sources except Capital Gains

Income from wages & salaries, small businesses & farms, rentals, dividends, interest, and from the government.

By Wolf Richter for WOLF STREET.

The surge of inflation since mid-2025 has knocked a hole into the purchasing power of the income that Americans earn, but not as bad as the hole during the high-inflation years from 2021 through mid-2022, which took big pay increases and well over a year to dig out of. Then, after rising through mid-2025, their earnings’ purchasing power got whacked again by the next surge of inflation – though smaller this time.

Inflation-adjusted personal income, excluding transfer receipts from the government (Social Security and other government programs), rose by 0.19% in July, the third month in a row of increases after a series of declines since September 2025. Compared to the peak in September, it was down by 0.63%. Compared to July last year, it was down by 0.38%. Compared to July two years ago, it inched up by only 0.86%. That’s the effect of a sudden increase of inflation that started mid-2025 while wage increases initially lag behind.

This income does not include capital gains where the wealthy make most of their money. And it does not include benefits paid by the government. It includes:

Wages and salaries
Employer contributions to private and government pension and insurance plans
Proprietor’s income (from personally owned businesses and farms)
Rental income
Interest income and dividend income

Not adjusted for inflation…

Personal income without transfer receipts from the government rose by 0.35% in July from June, and by 3.3% year-over-year, not adjusted for inflation, to a seasonally adjusted annual rate of $21.9 trillion in “current dollars” (while the chart above is expressed in “2017 dollars” for inflation adjustment).

Compensation of employees consists of wages and salaries and employer contributions to employee pension and insurance funds and to government social insurance. Compensation of employees accounted for 60% of total income.

Not adjusted for inflation, compensation of employees increased by 38% since January 2020. Increases in July from June, and year-over-year, by category:

Compensation of employees (red): +0.29% monthly, +3.5% YoY
Wages and salaries (blue): +0.29% monthly, +3.5% YoY
Employer contributions (purple double line): +0.27% monthly, +3.6% YoY.

Income from other sources: Two categories are income from investments (dividend income and interest income) and two categories are from entrepreneurial endeavors: Proprietor’s income (from personally owned businesses and farms) and income from rentals.

Dividend income became #1 in this group during the stock market surge fueled by the Fed’s money printing mania in 2020 and 2021. Since January 2020, it increased by 68%.

Proprietor’s income rose by 35% since January 2020, slightly behind wages and salaries (+39%). It remained #2 in this group, but the gap between it and dividend income widened.

Interest income declined after the Fed started cutting interest rates in 2019 and then rose again when the Fed hiked rates. Since January 2020, it increased by 30%.

Rental income has increased by 60% since January 2020, a result of the massive inflation, that included soaring rents in the 2020-2022 period.

Month-to-month and year-over-year by category:

Dividend income (red): +0.58% monthly, +3.6% YoY
Proprietor’s income (gold): 0.50% monthly, +3.1% YoY
Interest income (blue): +0.32% monthly, +3.6% YoY
Rental income (purple double line): +0.33% monthly, +4.0% YoY

Government social benefits to persons rose by 0.59% monthly and by 5.1% year-over-year. This includes amounts that are paid directly to consumers, such as Social Security benefits and unemployment insurance benefits; and it includes amounts that are paid to service providers, such as Medicare and Medicaid, with indirect benefits going to consumers.

Medicare, Medicaid, and V.A. payments to healthcare providers soared over the past 12 months.

But unemployment insurance benefit payments fell further.