By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumers turned gloomy in March as rising energy prices ignited fears of inflation, which could dent consumption and economic growth.
A closely watched survey on the housing market also released on Tuesday showed home prices fell for a seventh straight month in January, but held above the cyclical low touched in April 2009. While the reports were the latest to suggest a loss in growth momentum early in the year, the impact of high energy prices on the economy should be temporary.
Analysts see underlying growth as fairly strong, with an improving labor market lending support.
"We are likely looking at a continuing pattern of 'two steps forward, one step back' in terms of the collective mood, given the sources of uncertainty and risk that will not be easily resolved," said Jim Baird, a partner at Plante Moran Financial Advisors Kalamazoo, Michigan.
The Conference Board, an industry group, said its overall index of consumer attitudes fell to a reading of 63.4 in March after hitting a three-year high of 72.0 in February. The March reading was below economists' expectations for drop to 65.0.
Rising gasoline prices, boosted by unrest in the Middle East and North Africa, are eroding consumer confidence and raising inflation expectations. A separate confidence survey last week showed morale among households at its lowest in over a year in March.
Data on Monday showed consumer spending, adjusted for inflation, rose modestly in February, pointing to a slowdown in consumer spending in the first quarter after surging at a 4.0 percent annual rate in the final three months of 2010. The economy grew at a 3.1 percent pace in the fourth quarter.
"It suggests to me that consumer spending is already tracking at about half the rate of growth in the first quarter as it did in the fourth quarter. So already the economy is slowing down," said Christopher Low, chief economist at FTN Financial in New York.
Separately, the S&P/Case-Shiller composite index of home prices in 20 metropolitan areas slipped 0.2 percent in January from December.
The decline, which was below market expectations of a 0.4 percent drop, brought prices to just above the April 2009 lows. Economists say an oversupply of homes from foreclosures will keep house values depressed for a while.
Compared to a year ago, the index showed that prices fell 3.1 percent.
Still, sinking house prices are not seen derailing the economy as residential construction accounts for only about 2.3 percent of gross domestic product.
INFLATION EXPECTATIONS SURGE
U.S. financial markets were little moved by the data. Stocks on Wall Street rose on strength in large-cap tech shares, while prices for government debt fell. The U.S. dollar rose against a basket of currencies.
With gasoline prices on the rise, consumers expect inflation to increase. The Conference Board survey showed consumers' one-year inflation expectations rose to their highest since October 2008.
Economists said the jump in inflation expectations was unlikely to trouble Federal Reserve officials, whose massive efforts to stimulate the economy through government bond purchases have been aimed both at boosting the labor market and preventing prices from falling.
The U.S. central bank, which wants to ensure an inflationary psychology does not take root, said it was watching inflation and expectations for future prices closely, but that the upward price pressure from commodities should be temporary.
In Germany, worries about the global economy and inflation drove down consumer sentiment for the first time in 10 months going into April.
Economists saw limited impact on the U.S. economy from the March 11 devastating earthquake and tsunami in Japan.
The cutoff date for the consumer confidence survey was March 16 and few believed household moods were significantly affected by the events in Japan, which triggered a nuclear crisis and roiled global financial markets.
"There was already a big shift in sentiment before the earthquake," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. "The U.S. economy is mostly services. About 6.5 percent of cars sold in the U.S. are made in Japan and just 5 percent of car parts used in the U.S. are imported from Japan."
(Additional reporting by Wanfeng Zhou and Corbett Daly; Editing by Leslie Adler)