Family’s Plight Shows Inflation’s Bite

Don’t tell Cindee and Ben Castronovo that inflation is fairly tame.

“I can’t think of anything that hasn’t gone up,” Cindee said. She’s felt the impact of inflation in no uncertain terms several times in the last six months, as Ben has warned her not to use the debit card until they receive their next paychecks.

This is a relatively new experience for both of them. As middle managers in their late 40s, they are used to living comfortably in Chicago on more than $100,000 a year. But rising prices are gnawing at their budget, just as they are for most Americans.

When Cindee lugged a 20-pound bag of cat food out of a store recently, she felt the weight of inflation. “What’s up with that?” she asked herself as she pondered how the price had jumped 40% on a $15 purchase.

When she helped her 22-year-old daughter select laundry detergent, she wondered when the price had shot up $2.

When she fills her gas tank, the fumes of inflation are pungent.

Then there’s the nagging price of car insurance: It has been surging even though their driving records haven’t changed. To control the premiums, Ben switched to only liability insurance and raised the deductible to $1,000. Now he’s paying as much as he used to, but for less coverage.

Getting less for more money is what inflation is about. And the recently reported 1.2% monthly increase in inflation was a confirmation of what consumers like the Castronovos have felt for months: a creeping increase in prices that empties wallets quicker than a year ago, while their take-home pay remains relatively unchanged.

“What matters to people is not just how fast prices are rising, but how fast relative to what they are earning,” said economist Jared Bernstein of the Economic Policy Institute, a think tank. “You go to the market and fill a basket up with food and realize your paycheck isn’t going as far.”

The pinch for consumers is worse than the consumer price index suggests, Bernstein says, because of the astronomical rise in prices on a few expenditures that people need to make -- such as healthcare, housing and education.

Consider the Castronovos. The couple sat down recently to tally up accumulated debt on college loans for their children: Over the next 10 years, they will be paying off more than $110,000 for their daughter, who recently graduated from the University of Wisconsin-Madison, and a son, who is in his second year at Chicago’s Columbia College.

The Castronovos never thought paying for college would be easy, but they hadn’t expected public university tuition to rise more than 40% over four years. Nor had they expected the cost of a four-year college education to total about $100,000 for each child.

They didn’t expect interest rates on adjustable-rate student loans to rise as sharply as they have lately either -- helping to nudge $600 monthly payments to $800.

“It made me gulp,” Cindee said.

During the last five years, paying for a four-year education at a public university has climbed 44%, much more than the cost of inflation in the general economy, says economist Susan Baum, a College Board analyst.

Even if the rise in college costs is adjusted to reflect the overall inflation rate, the average price has risen 28%.

When the Castronovos’ daughter, Gina, started at the University of Wisconsin about five years ago, the tuition was $14,188. Four years later, the family had to pay $19,866, or about $23,000 including room, board and books. Cindee complained to the university about the sharp increase, to no avail; colleges were faced with cutbacks in state funding after the 2001 recession.

The legacy has been passed on not only to the Castronovos, but to Gina, who took out $17,500 in federal student loans.

College loans are becoming more of a burden for people in their 20s and 30s, taking up so much of their first-job paychecks that a study by public policy research group Demos has labeled them “Generation Broke.”

Such college costs also take on significant meaning for people the Castronovos’ age. At 47 and 49, the couple is well aware that they need to be saving for retirement. But paying off such loans is going to make it tougher to sock away what they will need. Cindee figures she will make up for lost savings by working part time, if she can, after retirement.

Meanwhile, she and Ben already have made changes to try to free up more money. A few years ago they stopped having a $60 housecleaner come to their home twice a month. Recently they cut a weekday newspaper subscription and an Internet provider. If they go to a movie, they choose a matinee, and if they go out to dinner, Cindee doesn’t order a drink.

“A margarita really adds onto the bill,” she said.

It’s not just her imagination. Since December 1997, the cost of ordering a drink away from home has climbed substantially -- 34.5% for wine, 24.3% for beer and 30.1% for distilled spirits, according to the Bureau of Labor Statistics.

When the Castronovos sit down with their bills each month to figure out what else they can cut, they are starting to feel as if they are fighting a losing battle. Necessities like healthcare keep rising as runaway medical costs cause employers to pass on more of the burden to employees.

Ben Castronovo says he’s paying an extra $100 a month in premiums for health insurance and has to pay more for prescriptions.

The Castronovos’ experience is becoming the norm. According to the Kaiser Family Foundation, premiums rose 9.2% in 2005, on average. Since 2000, premiums are up 73% and the average worker is paying $2,713 a year for family coverage -- nearly $1,100 more than in 2000.

Currently, workers are paying about 26% of the total premium, but a Kaiser survey suggests the future may be harder on households: About 40% of large firms say they are “very likely” to ask employees to pay a greater share of premiums next year.

That’s bad news for Karmel Kifarkis, a mortgage broker, who is being hit by three of the biggest categories of rising costs simultaneously -- health insurance, housing, and fuel.

She just incurred a $1,700 hospital bill for her daughter, even though she thought the $650 a month her husband, Joseph, was paying for health insurance would cover all medical expenses.

In addition, housing costs are a burden when combined with the $700 she and her husband are still paying each month toward their college loans.

About four years ago, Kifarkis, 36, watched prices soar and decided she could wait no longer for a first home. After six years of living with their three children in Karmel’s parents’ home, she and Joseph borrowed $25,000 from a family member and bought a $250,000 duplex. The idea was to reduce their $2,800-a-month payments by having a renter. The plan worked, and Kifarkis is glad she went for it when she did: She could never afford the home at today’s $540,000 value.

But now the prospect of heating bills this winter terrify her. They are expected to double, turning her $600 monthly bill to $1,200.

She doesn’t know how to stretch the checkbook that far. Housing and utilities already are taking an unmanageable level of her household’s $125,000 income. And she’d like to be able to get into a house with three or four bedrooms.

But like all Americans seeking new homes, housing price inflation is daunting. Nationally, home prices climbed 13.4% last quarter and 53.2% over the last five years, according to the Office of Federal Housing Enterprise Oversight. In the Chicago area, the five-year increase has been 47.2%, and 11.3% in the last quarter.

Kifarkis has all but given up on the idea of a larger house, especially since she won’t even be able to afford this winter’s heating bills without going into debt.

“I’d love to go to the renter’s door, knock on it and say: ‘Can you help with this?’ But I can’t do that to a single mother with children,” Kifarkis said.

So she probably will resort to using a credit card, even though she has vowed not to add anything to an already daunting balance of $8,000.

Kifarkis’ response to unexpected inflationary prices is not unusual. A nationwide Demos survey of low- and middle-income people this year revealed that moderate-income Americans are not using credit cards to live beyond their means, says researcher Tamara Draut.

Instead, the study of about 1,500 households showed about 70% of families are using the cards as a “safety net” for basic living expenses, medical expenses or repairs to cars or homes.

About 46% of the households said they were greatly burdened by their debt and were trying to pay it down. But without savings, surprise expenses caused them to pull out the cards anyway.

“I’m trying very, very hard not to use the credit card,” Kifarkis said. “But life gets in the way. Children have birthdays or need shin guards and soccer shoes or dental work.”