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Consumers cut back and scramble to deal with slump, rising prices

Now that a fill-up costs them $90, Minnie and William Lewis of Baltimore County have given up weekly pleasure drives on scenic routes.

East Baltimore resident Leonard Cochran is buying less meat at the grocery store and eating the wild rabbit and venison he can get free from his hunter friends.

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As for Thomas Brown of Baltimore and companion Dorothy Lewis, they're looking for jobs. He's 84; she's 75. "Everything is up," Lewis lamented. "The gas, electric, rent."

This is what happens when consumers feel stretched, pressed and battered by escalating costs as incomes aren't keeping up. Even as the U.S. economy worsens and businesses have begun cutting jobs, the price tag for everyday necessities such as food, heating oil, gas and electricity is spiking. Soaring shipping and commodity costs along with a slumping dollar are pressuring prices of the flood of imported goods that Americans buy.

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Thousands of homeowners with adjustable-rate mortgages are paying higher - in some cases sharply higher - monthly payments. And with property values falling, the home-equity tap has been shut off, an end to the ATM many Americans had been turning to as an income supplement - though they must still deal with the debt.

"This is definitely a tough time for consumers," said Scott Hoyt, director of consumer economics at Moody's Economy.com. "Savings - at least as measured by the government - is at a record low. Their ability to borrow to make up for that is lower than it's been ... in a lot of years, due to the reduced availability of credit, due to their near-record-high debt obligations. So consumers sort of don't have a place to turn."

Financial stretching to the breaking point can be seen in the rapidly rising number of mortgage defaults and foreclosures, but that's not the only result. Credit card and auto-loan delinquencies are heading up. So are hardship withdrawals from 401(k) retirement accounts - up 10 percent last year at Baltimore's T. Rowe Price Group Inc., which saw a sharp uptick toward the end of 2007.

'Alarming trend'

Eric Levy, retirement outsourcing business leader for Mercer, a consulting, outsourcing and investment firm, called the nationwide raiding of retirement plans "an alarming trend." With taxes and - in some cases - penalties to pay, it's the "account of last resort," he said.

"You're essentially taking money from yourself," said Stuart Ritter, a certified financial planner with T. Rowe Price.

The U.S. ended 2007 with the biggest increase in inflation since 1990. Last month the price of such staples as white bread and chicken was more than 10 percent higher than a year earlier, while eggs were up 40 percent. A gallon of reduced-fat milk, $3.25 a year ago in Baltimore, is now $4.

Little wonder free rabbit and venison look good. "I never had it before, but I can't afford" the alternatives, said Cochran, 46.

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Deborah Norman, 29, can't believe $4 milk. She's had to seriously cut back on family trips to restaurants, to her two children's dismay.

"I can't afford it," said Norman, a parole officer for the state. "Everything is going up but your salary."

Eating out less

Ken Harris, managing director with Cannondale Associates, a marketing and sales management consulting firm, said Norman isn't the only one shifting her behavior. "The restaurant industry is not performing as well as it had been because people are choosing to eat in more often," he said.

Cost increases aren't limited to food. Maryland's sales tax rose 20 percent last month. BGE customers, already hit by huge rate increases in the aftermath of deregulation, face another in June; by then they will be paying nearly 85 percent more than two years earlier. The average cost of health-insurance premiums doubled between 2000 and 2007, and the price for a gallon of regular unleaded gas climbed nearly as steeply.

Income in typical households, meanwhile, rose a comparatively pokey 33 percent in the Baltimore metro area between 1999 and 2006, the most recent numbers available.

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These trends might explain why, in a survey released by Fidelity Investments last week, the top concern for nearly half the people in their 30s and 40s was making ends meet. It's a concern for some retirees, too - that's why Lewis and Brown want to get jobs.

Brown's strategy for stretching his income: "Same food, but smaller quantities."

"What people see as the middle-class goods ... seem to be going up faster than inflation," said John Irons, research and policy director at the Economic Policy Institute, a Washington think tank that focuses on issues affecting low- and moderate-income workers. "As the dollar falls, imports become more expensive, so that puts pressure on prices across the board as well."

It's to the point that Christina Tracey, 30, has stopped driving from her home in Southeast Baltimore to see friends who live in Northeast Baltimore. The Highlandtown resident wants to save on gas. "It's sad," she said.

Though it's a wealthy state, Maryland can't escape these headwinds. Sales tax collections last month - for purchases rung up in December - were "surprisingly weak" because people pulled back on spending, state Comptroller Peter Franchot told Maryland leaders in a letter this month.

Good will prospers

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Sales rose strongly for at least one operation this month: Goodwill Industries of the Chesapeake, which has thrift stores across the region, "had a fabulous February," said Phil Holmes, vice president of public policy and development.

Some economists are worried about stagflation, that nasty mix of economic weakness and soaring costs that marked the 1970s. But Irons thinks the country's current slowdown will also slow companies' ability to pass their expenses on to consumers.

Ned Atwater, owner of the Atwater's bakery stores in Baltimore and Towson, wants to avoid price increases as long as possible. Bread at his company ranges from $1 to $4.50 a loaf, and he's concerned that $5 might be a thanks-but-no-thanks threshold for buyers.

But his monthly flour bill is now $15,400 - double what it was for the same quantity at the start of last year. Two weeks ago, the company discontinued its wholesale business, which has tighter margins than retail, because the math no longer worked.

"We buy directly from a certified organic mill," Atwater said. "Usually we just place the order and they fill it. This time, they faxed us the invoice because they were sure that we were going to be shocked at the rising prices."

Irons blames the increase in food costs mainly on the rising price of oil, necessary for farming and shipping. Analysts think the fuel situation won't get any better - auto club AAA says the annual spring run-up could bring $4-a-gallon prices.

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Windsor Mill resident Minnie Lewis, 65, has already had it. She and her husband are thinking of selling the Ford F-150 pickup they bought in 2004 because it's not fuel-efficient enough. Their drives on scenic routes through Pennsylvania have been cut from once a week to once a month.

To save money, Lewis has also started clipping coupons, doing no more than one load of laundry every two weeks and wearing an extra layer of clothing around the house to keep the thermostat set lower.

"When you see that everything is going up, you need to look within your budget to see what you can do to cut," said Lewis, a retired claims examiner for the Social Security Administration. "Some people, they see it but they don't prepare for it, and then all of a sudden, it's overwhelming."

jamie.smith.hopkins@baltsun.com eileen.ambrose@baltsun.com laura.mccandlish@baltsun.com

Sun reporter Liz F. Kay contributed to this article.


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