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Rising Expenses Have Consumers Feeling Pinched

By Nell Henderson, Cecilia Kang and Tomoeh Murakami Tse
Washington Post Staff Writers
Sunday, May 7, 2006

Gas. Food. Shoes.

Sometimes it seems like everything is costing more, said Haydee Rivera, 31, who said she often works 60 hours a week at her job with a fast-food takeout vendor. "For me, it is difficult because I would like to rest, but I can't."

Rivera is spending $60 a week for gasoline, up from about $40 a year ago. Her grocery bills keep climbing, and the shoes for her four boys seem more expensive with every pair.

The Wheaton resident said she saves where she can -- buying fewer new clothes and shoes for herself, avoiding restaurants, relying on her mother for the children's day care. "Then we have more money for food," she said.

Most everybody these days can point to their own list of rising expenses. Electricity, air travel, medical care and even staples such as diapers cost more. Rents are jumping as the housing boom cools, just as property taxes are soaring to reflect the price appreciation of the hotter days.

Plus, interest charges are rising on credit card balances, home-equity lines of credit and adjustable-rate mortgages.

This is how it feels when the days of cheap energy and easy money give way to $70 barrels of oil and ascending interest rates. The economy may be strong, but many people are feeling pinched.

Economists say that feeling overshadows the fact that inflation overall is relatively low -- running at a 3.4 percent annual clip, the same rate as all of last year. The Federal Reserve has been raising interest rates for nearly two years to control inflation, and it is likely to again boost rates this week.

The rate increases were intended to slow a frenzy of consumption that built over the first half of this decade, when government policymakers used tax cuts and low interest rates to prod consumers to keep spending through a recession and the sluggish economic recovery that followed.

Consumers responded enthusiastically, snapping up autos, fueling a housing boom and splurging as a wave of mortgage refinancing turned rapidly appreciating homes into cash machines.

Higher interest rates, energy prices and other expenses are now causing some consumers to rethink their spending habits. So far, many families have been able to absorb the increases without having to tighten their belts much. But others have started to adjust to the new reality.

"We don't save much," said Peter Hays, 45, an airline pilot who said his property taxes have gone up more than $200 a month since he bought his Arlington split-level house five years ago. That forced him to cut back on discretionary spending, such as contributions to the college savings funds for his two small children, he said. "We don't eat out often. We don't vacation. We don't make big plans. We would like to do home improvements, but that's not going to happen."

Bijou Mgbojikwe, 23, a second-year law student at George Washington University, said she tries not to think about rising tuition costs and her rising student loan debts. But every semester, she finds she has less money to cover living expenses after paying for classes, books and other costs.

And airfares between Washington and her home in Massachusetts are up.

So she's canceled her home Internet service, saving $50 a month. She rarely eats out anymore. Instead, she eats frozen meals made by her mother. "That's pretty much what I live off of the entire semester," she said.

Arlyne Foy of Fairfax city said she and her husband recently slammed the brakes on plans to buy a larger home in Loudoun County because of rising mortgage rates and the prospect of much higher commuting costs and utility bills.

Foy, 40, and her husband figured they could have afforded a bigger house, since their 3,000-square-foot townhome probably had grown about $200,000 in value since they bought it two years ago. But they didn't want to part with their very low 4.875 percent mortgage or her husband's 10-minute drive to work as a massage therapist and yoga instructor.

"The thing is, we're very comfortable," said Arlyne, a homemaker who cares for their 3-year-old daughter. "And we know we aren't going to find an interest rate as excellent as the one we have now."

Rebeccah Ballo, 26, an urban planner, and her boyfriend, Frankie Ali of Alexandria, decided to buy a townhouse when they found out their rent would be rising. The change required Ali, a Web designer, to give up his beloved Mitsubishi Eclipse in favor of Ballo's more fuel-efficient Volkswagen Jetta. That saved $500 in car payments and insurance. Their new location will allow them to bike to work and save money on gas.

Many people wonder how the Fed can say inflation is largely contained when their day-to-day costs seem to be rising. The explanation lies in the difference between an economist's technical definition of price inflation and an individual consumer's sense of the overall cost of living.

Economists view inflation as the rate of increase in the general level of prices for goods and services. That's the net result after combining both rising and falling prices. And it doesn't include income taxes or the interest consumers pay on what they borrow.

Consumers, though, tend to notice rising prices for things they buy frequently -- such as gasoline and food -- more than falling prices, particularly for items they don't buy as often, such as personal computers and phone service. And many consumers have boosted their household expenses over time by tacking on additional monthly bills that didn't exist decades ago, for cellphones, cable television, DVD rentals, sports clubs and Internet access.

Inflation did pick up last month, according to the Labor Department's consumer price index, which rose 0.4 percent in March after edging up just 0.1 percent in February. Much of the recent increases have reflected surging energy prices, which rose 17.3 percent in the past 12 months. But prices rose as well for food, housing, medical care and education, the Labor Department reported.

The Fed seeks to keep inflation under control and unemployment low by using interest rates to guide the economy's pace of expansion. When the economy slumps, the Fed lowers rates, making it cheaper for consumers and businesses to borrow and spend, spurring economic growth and hiring. When the economy grows too rapidly, the Fed lifts rates to achieve the opposite effect.

So while consumers may see higher debt charges now as just another rising expense, the Fed regards them as necessary medicine to prevent the worse disease of broader, persistent inflation, like the kind that reached into double digits in the 1970s. After all, last year's consumer price index rate was the highest in five years.

Fed policy, however, can't control the price of oil, which is set by global markets largely on the basis of supply and demand. To better gauge what's happening in the rest of the economy, economists look at so-called core price measures, which exclude food and energy, for a sense of underlying inflation. The core CPI rose 0.3 percent in March, the fastest pace in a year, and is up 2.1 percent over the past 12 months -- a rate considered low by historical standards.

In a strong economy with low unemployment and rising income, many households can afford to absorb some rising costs.

Most homeowners -- about 83 percent -- don't have to worry about rising mortgage rates because they have either no mortgage or a fixed-rate mortgage, said Doug Duncan, chief economist of the Mortgage Bankers Association. That leaves 17 percent with adjustable-rate mortgages who may see their monthly payments climb, though many of these loans have fixed rates for two or more years.

Also, millions of Social Security recipients and federal retirees receive an annual cost of living adjustment, or COLA, that boosts their monthly benefits to cover inflation. And federal employees and retirees, and spouses of deceased fed retirees, have health insurance. This is a boon for the Washington area, which has more than 400,000 federal retirees and surviving spouses of deceased retirees.

"We're not pinched," said Charlie Kearney, 71, of Rockville, who managed a federal budget office before he retired 20 years ago. With no commute to work and with a wife who is semi-retired from teaching, "the gas thing is more an annoyance than a real pinch, because we don't do that much driving."

Kearney said their home heating bill rose by about $130 a month last winter. He knows a bigger electric bill is looming. He expects their property taxes to jump when their house is reassessed. And he pays 14 monthly bills today, compared with seven two decades ago. But he has a pension, health insurance and a house that is almost paid for. "We're not hurting."

But for workers such as Haydee Rivera, the math is tougher.

She earns $10.70 an hour at her job. Her husband is a restaurant worker. She used to spend $100 for a week's worth of groceries. Now the family of seven, which includes her mother, spends that much every three days.

But what really galls her, she said, are the boys' shoes. She had braced herself to buy a $50 pair for her 12-year-old son, but he wanted the $80 style, she said, shaking her head during a recent lunch break.

"Everything is too expensive today," Rivera said. "It's a lot of money."

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