U.S. consumer confidence rose to a nine-month high in June, a survey showed on Friday, but inflation gauges showed worrisome signs of price increases that could slow any recovery from the longest recession since the Great Depression.

June's consumer confidence reading failed to surpass the level reached last September, when the spectacular failure of Lehman Brothers sent the world economy into a tailspin.

The Reuters/University of Michigan Surveys of Consumers said its preliminary index of confidence for June rose to 69.0 from May's 68.7. That was slightly below economists' expectations of a 69.5 reading, according to a Reuters poll.

For the third straight month, the overall consumer sentiment reading was at its highest since last September's 70.3.

It's good news but not great news, Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, New York, said of the June confidence data.

So the basic message is that sentiment is improving and that's good news. We'd like it to have been better but it wasn't, so be it.

On Wall Street, stocks extended their losses after the slightly weaker-than-expected reading on consumer confidence.

U.S. government bonds, which perform better during periods of economic weakness, extended their gains, as did the dollar, while the euro hit session lows.

In a worrying development, inflation readings in the consumer sentiment data and a separate report on import prices revealed potential price pressures at a time when the economy appears to be on track for recovery from the worst recession in decades.

U.S. import prices rose 1.3 percent in May, the Labor Department said, but the gain was powered by petroleum prices and underlying import price pressures were more muted.

Analysts had forecast import prices would rise 1.3 percent after a revised 1.1 percent rise in April, previously reported as a 1.6 percent increase. May's gain was the largest since a 1.4 percent advance in July 2008.

Rising prices, particularly for necessities such as fuel, are unlikely to inspire spending by consumers, who were the key drivers of growth in recent decades but are now saddled with debt and facing the highest unemployment rate in nearly 26 years.

EXPECTING INFLATION?

Gauges of inflation expectations in the Surveys of Consumers report rose to their highest in months, creating concern for the Federal Reserve, which has pumped vast amounts of money into the financial system to spur economic recovery.

Historically speaking, loose monetary policy is generally the opposite of an inflation-fighting strategy, while battling a surge in prices usually slows the economy.

Consumers' one-year inflation expectations rose to 3.1 percent in June -- the highest since October 2008 -- from May's 2.8 percent.

The five-year inflation outlook rose to 3.1 percent in June from May's 2.9 percent. That was the highest in the long-term inflation expectations since February this year.

If this translates into actual price rises, it creates a dilemma for the Fed over whether to tamp down inflation or make further efforts to revive economic growth.

This also comes at a time when sentiment is deeply bruised by the ongoing weakness in the housing market, decades-high joblessness and turmoil in the banking and auto industries.

The economic damage from those crises may be felt for a long time to come, consumers worry, overshadowing perceptions of economic recovery.

Job and income uncertainty ... remained high and constitute a significant barrier for completing planned purchases, the Surveys of Consumers said in its report.

The economic recovery was thought to be weaker than originally anticipated, leading consumers to expect a longer period of time before the recovery gets underway.

Reflecting ongoing worries, consumers' assessment of the 12-month economic outlook fell. That gauge declined to 61 in June from 75 in May.

(Additional Reporting by Charles Mikolajczak; Editing by Dan Grebler)

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