Prices rising faster than income

Gene Meyer | McClatchy Newspapers

5/12/2008 - 5/13/08

KANSAS CITY, Mo. — There's a simple reason why it might feel as if your paycheck is gone before you get it.

Put simply, prices for the stuff we buy are rising faster than our incomes.

That's exactly what's been happening nationwide since at least October, according the Economic Policy Institute.

Researchers at the nonpartisan Washington think tank calculate that paychecks — which a year ago were rising about 1 percent faster than prices — now trail those prices by a half-percentage point or more, largely because of soaring food and fuel prices.

The bottom line: Household buying power has been cut by roughly 1.5 percent.

The erosion is likely to continue, and perhaps worsen, for at least a couple of years, said Larry Mishel, the institute's president.

"Now, wages are slowing down faster, but food and energy prices are driving costs even higher," he said.

It's exactly the sort of trend that fuels talk about recession. And those grinding economic pressures are sure to shape how households use the wave of economic stimulus payments — those $300 or larger tax rebate payments that started hitting bank accounts this month.

More checks are in the mail. And even their strongest supporters acknowledge that the jury is still out on their ultimate effect on the economy.

"We're facing some pretty strong headwinds," Treasury Secretary Henry Paulson said last week in Kansas City, where he watched the first batches of the paper rebate checks being printed.

Paulson said the rebates should perk up the economy by later this summer and take some sting out of higher prices for food, fuel and health care. He added that the stimulus would lead to the creation of 500,000 new jobs by the end of the year.

Others are less certain about their long-term effect.

In terms of providing a boost to the economy, "they're a good idea if the money goes to people who are inclined to spend it," Mishel said. "But they won't correct the long-term squeeze."

Loosening that squeeze, policymakers and financial advisers say, depends on the actions of millions of individuals, such as Janine Bosarge of Blue Springs, Mo., a 39-year-old single mother of three.

Bosarge recently decided to cut household expenses — big time.

"As a single mom, I didn't think there was any place I could cut," she said. "I went through a period when I didn't even open the mail, because I knew it was a bill or a collection notice."

But after enrolling in a self-help course offered by Essential Knowledge, a financial-education company in Mission, Kan., Bosarge said, she has learned to be comfortable making choices between needs and wants that once seemed unthinkable. Cutting fast-food purchases was easy. Carpooling was harder. Cutting off allowances for her children — ages 12, 17 and 19 — was wrenching.

"You need to be brutally honest with yourself and know where your money goes," Bosarge said. "Then you learn where you can cut back and where you can't."

And what will she do with the economic stimulus check?

"It's going straight into my savings account," she said. "I know they want me to spend it. But in the long run, I'm better off building up a cash reserve so that I don't have to go back to credit cards if something goes wrong."

Economists are sensing that growing numbers of us are leaning toward following Bosarge's advice.

A survey by online credit-card information provider CreditCards.com suggests that only about one in 10 consumers intends to spend the economic stimulus as impulsively on discretionary items as federal officials hope.

Lower-income consumers, those making $30,000 or less, plan to spend the money, but on such things as groceries, utilities and other necessities, the survey found. About half of all the consumers quizzed say they will simply save the money or use it to pay down debt.

A similar survey by the American Institute of Certified Public Accountants found that single consumers are more apt than others to save their stimulus money. Working moms with children are most apt to pay debts. And retirees and married couples are most apt to spend the money.

The stimulus payments certainly come at a crucial moment for the economy.

The Commerce Department reported that consumer spending grew at an anemic
1 percent annualized rate during the first three months of this year, down from 2.9 percent in 2007 and 3.1 percent in 2006.

Policymakers continue to debate whether such slow growth is tipping the U.S. into a recession.

Based on past history with similar rebates in 2001 and 2003, most households will spend between one-third and two-thirds of the stimulus payments, which so far are running an average $920, Paulson said.

Cumulatively, those payments plus business tax breaks in the stimulus plan are a roughly
$150 billion shot in the arm, equal to about 1 percent of the nation's economic output and enough to make a "real difference," Paulson said.

But the Economic Policy Institute notes that national economic growth since the last recession ended in November 2001 has been the weakest for any comparable growth cycle since World War II.

As a result, working families, for the first time in history, are heading into a new recession with lower incomes and fewer resources than when the last one started.

"Families are facing a daunting challenge to their living standards," EPI researcher John Irons said. "This is bad news not just for them, but for the whole economy."

So what can consumers do to meet the challenge?

First, don't assume that all your worries will go away once the rebate money is in your hands, said Graham Moyer, chief executive of Essential Knowledge.

"Many people assume ... that all their problems would be solved if they just had more money," he said. "But it's not about income. It's about changing behavior."

What consumers really need to learn is to set specific goals and keep precise records of what they spend to find out where they can save money to meet their goals, he said.

Also, use cash, not credit cards, to pay for as many things as possible, Moyer said.

"It will help remind you that this is your money you are spending," he said.