Consumers turned gloomy in March as rising energy prices ignited fears of inflation, a change in mood that could dent global economic growth.
Another report on Tuesday showed home prices fell for a seventh straight month in January but held above their post-housing bust low of April 2009.
The reports added to signs the U.S. economy lost momentum in early 2011, although the impact of high energy prices -- aggravated by unrest in Middle Eastern countries -- is likely to be temporary, economists said.
They point to an improving labor market as underpinning growth.
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 index of consumer attitudes fell to 63.4 in March after hitting a three-year high of 72.0 in February. The March reading was below economists' expectations for a 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 survey last week showed morale among households at its lowest in more than a year.
The Conference Board found one-year price expectations rose to their highest since October 2008.
Economists said the jump in inflation expectations was unlikely to trouble the Federal Reserve, which has said price pressure from commodities should be temporary. Core inflation, which strips out food and energy costs, is not far from recent record lows.
In Germany, worries about the global economy and inflation drove down consumer sentiment for the first time in 10 months.
U.S. financial markets were little moved by the data.
LOSING SOME MOMENTUM?
The weaker U.S. confidence survey came on the heels of numbers on Monday that showed consumer spending, adjusted for inflation, rose only modestly in February, pointing to a slowdown in first-quarter economic growth.
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, said Christopher Low, chief economist at FTN Financial in New York.
The apparent hiccup in growth comes as policymakers at the Fed ramp up a debate on whether the economy is strong enough for the central bank to scale back its massive stimulus program.
The head of the St. Louis Fed, James Bullard, said the U.S. central bank could trim its bond-buying by $100 billion before its scheduled expiry in June. His tone contrasted with other top Fed officials who said on Monday the economy still needed the program's full $600 billion of support.
Bullard, a non-voting member of the policy committee , is not seen as representative of the consensus at the Fed, which backs seeing the easing program through. However, another Fed official, Dallas Fed President Richard Fisher, echoed Bullard's skepticism about the easing, saying he would use his vote on the panel this year to object to any efforts to expand it.
Jittery markets, nervous about a pick-up in inflation and the likelihood other major central banks will tighten policy in response to troubling signs of price pressures, are on high alert for any evidence the Fed could reverse course and took their cues from the more hawkish Fed commentary.
The dollar rose against the yen and against a basket of other major currencies after Fisher's remarks during a late Fox Business television interview.
The S&P/Case-Shiller composite index of home prices in 20 cities slipped 0.2 percent in January from December. The decline was less severe than expectations of a 0.4 percent drop, but economists say an oversupply of homes from foreclosures will keep house values depressed for a while.
Compared with a year ago, prices fell 3.1 percent.
Sinking house prices are not seen derailing the economy as residential construction accounts for only about 2.3 percent of gross domestic product.
Economists also see limited impact on the U.S. economy from the devastating March 11 earthquake and tsunami in Japan. Some firms have been forced to scale back production at U.S. plants due to shortages of key parts or components imported from Japan.
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.
The cutoff date for the consumer confidence survey was March 16.
(Additional reporting by Wanfeng Zhou, Corbett Daly and Mark Felsenthal; Editing by Leslie Adler and Dan Grebler)