"Stunning" price drop lifts consumers' mood

NEW YORK (Reuters) - Consumer confidence rose unexpectedly in November, rebounding from a record drop the previous month as tumbling gasoline prices produced a "stunning" drop in inflation expectations, a survey showed on Friday.

The diminished inflation worries provided a rare bit of relief for consumers dogged by unemployment and recession fears.

Sentiment remains at historically depressed levels and a sustained rebound in consumers' mood will face difficulties with unemployment at a 14-year high, declining home values and tumbling financial markets.

"The outlook for the consumer is very bleak. You have rising unemployment, low confidence, very weak wage growth," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.

"The only silver lining is gasoline. Consumers are using the money they are saving at the gas pump to try to rebuild their savings to the extent they can, especially given the wealth they've lost in their homes and in the stock market."

The Reuters/University of Michigan Surveys of Consumers said its index of confidence edged up to 57.9 from 57.6 in October. The index remains below the lowest levels hit during the last two recessions.

The index came in above economists' expectations of 56.0, according to the median of forecasts in a Reuters poll.

U.S. stocks briefly pared losses after the data, while the dollar trimmed its losses against the yen.

Government bonds, which benefit more from signs of economic weakness, pared their gains.

"Lower gas prices and sizable discounts at retailers helped to slightly improve consumers' assessments of current economic conditions, while higher unemployment and a deepening recession dimmed their expectations for future gains," the Surveys of Consumers said in the report.

However, the good news appeared limited, with consumers' expectations for the future falling to 55.7 from 57.0 for the lowest since July, when record-high oil prices squeezed personal finances.

Since then, financial market turmoil, recession and rising unemployment have replaced high fuel costs as worries dogging consumers.

Indeed, one-year inflation expectations tumbled in November to 2.9 percent from 3.9 percent in October. This is the lowest since December 2006, when they were also at 2.9 percent.

The drop in one-year inflation expectations was the largest one-month fall since November 2005.

"The decline in the inflation rate was stunning, as 37 percent of all consumers expected a zero inflation rate or deflation during the year ahead in early November, up from just 5 percent six months ago," the report said.

"Unfortunately, lower inflation was viewed as a consequence of a weakening economy."

The report said consumers were "unanimous in their recognition that the economy was in recession" with a record 97 percent holding that view.

The data indicated that consumers expected the unemployment rate to top 8 percent, perhaps rising has high as 8.5 percent.

The University of Michigan confidence index dates back to 1952. Its record low was 51.7, which it hit in May 1980.

(Editing by Tom Hals)