Weak confidence, PPI jump stoke U.S. stagflation fear

By Burton Frierson

NEW YORK (Reuters) - The outlook of U.S. consumers sank to a 17-year low this month as the job market deteriorated, while costly commodities drove producer price inflation in January to its highest in more than 26 years, according to reports that stoked fears of stagflation.

Adding to Tuesday's economic bad news, data showed that the collapse in U.S. home prices accelerated to a record pace in the fourth quarter of 2007. Prices plunged 8.9 percent year-over-year, according to the S&P/Case-Shiller U.S. National Home Price Index.

The U.S. Labor Department reported producer prices jumped a monthly 1 percent in January on rising energy costs and saw an annual 7.4 percent increase. It was the biggest 12-month gain in more than 26 years, when the United States was emerging from a period of low growth and high inflation known as stagflation.

The Conference Board said its index of consumer sentiment fell to 75.0 in February, significantly worse than economists' forecasts and its lowest since confidence dropped precipitously at the start of the Iraq war five years ago.

Excluding that sharp fall in February and March 2003, February's reading was the lowest since late 1993. The Conference Board's expectations index fell to 57.9 -- its lowest in 17 years.

"It looks like there is no confidence in an economy where inflation is getting out of control," said Andrew Brenner, market analyst at MF Global in New York. "This is a classic stagflation scenario."

In the face of fresh signs of economic weakness, a top Federal Reserve official played down the risks presented by current price growth, saying the danger the U.S. economy will weaken further is a bigger worry than higher inflation.

"I do not expect the recent elevated inflation rates to persist," Fed Vice Chairman Donald Kohn said in a speech at the University of North Carolina at Wilmington.

"In my view, the adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States," he said.

The bad news pouring in from the beleaguered housing market appeared to bolster his case on growth.

In a topsy-turvy trading session, U.S. stocks erased early losses and rose after tech giant IBM (IBM.N) raised its profit outlook.

More consistent with the weakening growth outlook, the dollar eased and government bonds, which usually benefit from weak economic data, rose in price.

BIG DROPS

The deterioration in consumer confidence was pronounced.

It was the biggest monthly drop in the consumer confidence and expectations indexes since September 2005, following Hurricane Katrina. The present situation index saw its biggest tumble since October 2001, during the last U.S. recession.