US consumers' mood improves on massive price drops

U.S. consumer sentiment improved this month helped by falling gasoline prices, retail discounts and "tumbling" inflation expectations, but pessimism over the future tempered their enthusiasm, a survey showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its index of confidence for December rose to 59.1 from November's 55.3, aided by the fall in one-year inflation expectations to their lowest in five years.

That was the highest since September and contrary to economists' expectations of a fall to 54.8, according to the median of forecasts in a Reuters poll. Their projections ranged from 50.0 to 58.0.

Despite the improvement, sentiment remains depressed by historical standards. The University of Michigan confidence index dates back to 1952 and is still mired near the record low of 51.7 hit in May 1980.

"Consumer confidence edged slightly higher in early December due to the collapse of gasoline prices, deep discounts by retailers and tumbling inflation expectations," the report said.

"Nonetheless, consumers have become even more pessimistic about prospects for the overall economy, especially the outlook for employment."

Though sentiment firmed and consumers' assessment of current economic conditions improved, expectations declined for the third consecutive month, hitting their lowest since June.

One-year inflation expectations fell to 1.7 percent -- their lowest since July 2003 -- from 2.9 percent in November. It was the biggest drop in one-year inflation expectations since November 2005.

Five-year inflation expectations fell to their lowest in nearly four years, dropping to 2.7 percent in December from November's 2.9 percent.

In the short term the drop in inflation expectations will help consumers, who struggled with rising prices all year, and will also aid the Federal Reserve's attempt to stimulate the moribund economy.

However, it will also heighten worries that the deepening year-old U.S. recession could lead to a debilitating deflationary spiral of falling prices, wages and economic activity last seen in the United States during the Great Depression of the 1930s.