U.S. consumer confidence fell to a 28-year low in May on soaring inflation expectations, while spending and price growth moderated last month, reports showed Friday.
The data heightens the dilemma facing the Federal Reserve, which has loosened monetary policy to cushion the economy while betting the slowdown would put the squeeze on inflation.
The Reuters/University of Michigan Surveys of Consumers said its confidence index fell to 59.8 in May -- the lowest since 58.7 in June 1980 -- from April's 62.6.
Government figures showed price growth moderated in April.
But the Michigan report's short-term inflation expectations gauge jumped to the highest level since the stagflationary early 1980s, and longer-term views on price growth hit their highest since 1995.
"Consumers are running scared. These price data are bad for consumers and businesses," said David Wyss, chief economist at Standard & Poor's Ratings Services in New York. "We are not going to see the economy getting better any time soon. We are still in the early stages of the recession."
The Reuters/University of Michigan index was slightly above Wall Street's median expectation of 59.5 in a Reuters survey of economists.
However, markets focused on a tame inflation reading in the government data.
The core personal consumption expenditures price index, which excludes food and energy prices, showed underlying inflation slowed on a monthly basis in April to 0.1 percent, as expected, from 0.2 percent in March.
However, the core index, which is the Fed's favorite inflation gauge, showed annual inflation held steady at 2.1 percent last month. That was still above the Fed's perceived comfort zone, which tops out at 2 percent.
U.S. personal spending rose 0.2 percent in April as forecast, government data showed. But real spending adjusted for higher inflation was stagnant.
Personal spending, under scrutiny as a barometer of how consumers fare as the U.S. economy cools amid soaring energy costs and a slumping housing market, had risen by 0.4 percent in March.
The Commerce Department said personal income gained 0.2 percent in April, following an upwardly revised 0.4 percent increase in March.
But adjusted for inflation, after-tax income stagnated in April for the second straight month, while real personal consumption was also unchanged in April after a 0.1 percent March rise.
The Michigan report conflicted with government inflation figures.
Its gauge of one-year inflation expectations surged to 5.2 percent -- the highest since February 1982 -- from 4.8 percent in April. Worse yet, five-year inflation expectations jumped to 3.4 percent, the highest since April 1995. In April this year they were at 3.2 percent.
The report heightens worries that the United States could be entering a period of stagflation like the late 1970s and early 1980s, characterized by a sluggish economy and accelerated price growth.
In another sign of economic weakness, business activity in the U.S. Midwest contracted in May for the fourth consecutive month, although the rate of downturn moderated.
The National Association of Purchasing Management-Chicago business barometer rose to 49.1 in May from 48.3 in April, but remained below the level of 50 that indicates contraction.
That meshed with the weak Michigan report and data on spending.
In more signs of trouble for a Fed eager to convince Americans that inflation is under control, the Michigan report showed a record-high 55 percent of consumers rate U.S. government economic policy as poor.