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

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.

Sentiment suffered on a worsening view of the job market. The measure of "jobs hard to get" rose to 23.8 in February -- its highest since October 2005 -- from 20.6 in January.

The measure of "jobs plentiful" fell to 20.6 -- its lowest since April 2005 -- from 23.8.

The proportion of respondents identifying jobs as plentiful fell by 3.2 percentage points, the biggest drop in a year and a half. The jobs hard to get response shot up by the most in nearly five years.

The 8.9 percent year-over-year decline in the S&P/Case-Shiller home price index was the largest in its 20-year history and came as housing was pressured by a huge supply of homes for sale, rising foreclosures and tighter lending conditions.

By comparison, during the 1990-91 housing recession the annual rate bottomed at a 2.8 percent drop.

A separate report added to the gloom in housing, a key source of troubles in the economy and financial markets.

The Office of Federal Housing Enterprise Oversight said U.S. home prices posted a second consecutive quarterly drop in the fourth quarter, with every state except Maine recording lower prices.

The housing finance company regulator said that, compared with the third quarter of 2007, house prices fell by 1.3 percent.

(Additional reporting by Julie Haviv in New York; Mark Felsenthal and Patrick Rucker in Washington; and Jim Brumm in Wilmington, North Carolina; Editing by Jonathan Oatis)