Despite the failure of their wages to keep pace with inflation, American consumers have kept shopping. Consumer spending has continued to rise. Analysts say that's partly because some shoppers are thinking less about their paychecks and more about their biggest asset: their homes.
Home prices rose 21.1% in Southern California and 9% nationwide from February 2004 to February 2005, sheltering consumers, and the economy, from much of the pinch of higher prices.
"There's been a wealth effect afoot throughout much of the recession and the recovery," said Bernstein of the Economic Policy Institute, "because no matter what people's incomes were doing, their wealth was improving -- their biggest assets, their homes, were accruing."
As inflation sparks higher interest rates, most economists expect the housing market to cool, making shoppers more dependent on their paychecks. And even those who have seen their paper wealth rise phenomenally aren't happy about rising costs and stagnant pay.
Corina Swatz has seen the value of her Silver Lake home triple in about a decade. But neither she nor her husband has gotten a raise in more than a year. Meanwhile, gas prices have forced them to shell out $55 to fill the tank of their Chevy Tahoe.
"I used to spend $600 a month [on groceries]. Now I spend $800," Swatz, a mother of two, said as she made her weekly Costco run last week. The increased value of her home gives her only so much solace. "We're hanging in there."
The danger is that people like Swatz, despite their home equity cushion, may pull the rug out from under the economic expansion by reining in their spending.
That's what Gabriel Torres has done. The 56-year-old cook, who lives in Hollywood, hasn't gotten a raise in years but pays ever-higher prices to fill his Nissan Xterra. He and his wife have come up with a solution: Cut down on driving.
"We don't go out much," Torres said. "We used to. But now we only drive when we really have to."
