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Consumer confidence ebbs, boosts rate hopes (Reuters)

By Lucia Mutikani Fri Dec 22, 11:46 AM ET

NEW YORK (Reuters) - U.S. consumer confidence ebbed in December, while a key measure of inflation held steady in November for first time in four years, boosting the chances of Federal Reserve interest rate cuts in 2007.

The University of Michigan said the final December reading of its consumer sentiment index slipped to 91.7 from 92.1 in November.

However, the index was slightly above economists' median forecast of a 90.2 reading, causing government bond prices to deepen losses. The dollar rose across the board, reaching close to a two-month high against the yen .

Analysts said the survey, coupled with earlier reports on core personal spending prices and durable goods, was likely to give comfort to officials at the Fed, who have said inflation is at uncomfortably high levels.

"The inflation readings show contained inflation expectations, as the Fed has been hoping for, even if there's no indication of significant new progress," Pierre Ellis, senior economist at Decision Economics in New York.

The University of Michigan's price expectations over a one-year period, an important guidepost for interest rate policy, dipped to 2.9 percent, its lowest since February 2005, from 3.0 percent in November.

The Commerce Department reported its core November personal spending price index, which excludes volatile food and energy costs, was unchanged from October -- the first time since October 2002.

The last time there was a drop in core prices was in September 2001, when core prices dipped 0.5 percent. Core prices rose 0.2 percent in October and analysts had expected a 0.2 percent increase.

CHRISTMAS PRESENT FOR THE FED?

Core prices rose 2.2 percent from November 2005, a slower pace than the 2.4 percent 12-month rise in October. Fed policy-makers have are thought to want the rise in core prices to stay between 1 percent and 2 percent over 12 months.

"It's a nice Christmas present for the Fed. It has moved half the distance toward the top end of their comfort zone," said Nigel Gault, director of U.S. economic research at Global Insight in Waltham, Massachusetts.

The central bank raised the fed funds rates 17 times between mid-2004 and June 2006, and market expectations are that it will start trimming interest rates sometime in 2007 to stimulate slowing economic growth.

The Commerce Department report also showed that personal income rose 0.3 percent in November after a 0.3 percent gain in October, while spending climbed 0.5 percent after increasing 0.3 percent a month earlier.

Analysts were expecting income to rise 0.4 percent and spending to increase by 0.6 percent.

Separately, new orders for U.S.-made durable goods rose a larger-than-expected 1.9 percent in November on aircraft sales, but fell when airplane orders were stripped from the data, a second Commerce Department report showed on Friday.

Excluding volatile transportation orders, which are heavily skewed by aircraft, durable goods orders fell surprisingly by 1.1 percent. It was the second consecutive monthly drop in durables orders excluding transportation and the fourth decline in the last five months.

Analysts polled by Reuters were expecting durables orders to rise 1.5 percent overall and also to gain 1.0 percent when transportation orders were stripped out.

Transportation equipment orders rose 9.4 percent in November, pushed up by a 7.2 percent gain in civilian aircraft orders and a 40 percent surge in defense aircraft and parts.

Excluding defense, orders rose 0.6 percent, slightly weaker than analysts' expectations of a 0.7 percent gain.

Nondefense capital goods orders excluding aircraft, a proxy for business spending, dipped unexpectedly by 1.4 percent. Analysts had expected a rise of 0.9 percent.

(Additional reporting by Mark Felsenthal)

Regions : Americas

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