Consumers' mood as grim as early-80s

By Burton Frierson

NEW YORK (Reuters) - U.S. consumer confidence tumbled to a 28-year low this month as rising prices strained household finances, while another drop in single-family housing starts underscored problems still plaguing the economy.

Friday's reports highlighted worries that the United States could be entering the early days of a period of stagflation like the late 1970s and early 1980s, characterized by a sluggish economy and accelerated price growth.

The data showed consumers' short-term inflation expectations hit a 26-year high, heightening the dilemma facing the Federal Reserve, which has bet that a slow economy will tame prices.

"The Fed has continuously said they want to contain inflation expectations -- and they are not contained," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

"The Fed is going to have to address inflation expectations in some manner, whether they talk it down or they force it down, possibly by taking away the aggressive rate cuts over the last year."

Stocks ended little changed another record high in oil prices helped energy shares, though it reminded investors of inflation worries. The bond market, which abhors inflation, ended lower.

The Fed has slashed its target for the benchmark overnight federal funds rate by 3.25 percentage points since crises in the housing and credit markets last year pushed the economy toward recession. The rate cuts are a textbook response to the threat of recession, but the opposite strategy used to fight inflation.

GRIM MOOD  Continued...