Feb. 29 (Bloomberg) -- U.S. consumers lost confidence in February as the labor market cooled and inflation picked up.

The Reuters/University of Michigan final index of consumer sentiment decreased to 70.8, from 78.4 in January. The measure is the lowest final reading since February 1992 and compares with a preliminary measure for February of 69.6 reported two weeks ago.

The first drop in employment in more than four years last month and higher gasoline prices are causing Americans to take a dimmer view of the economy and their own financial situations. Federal Reserve Chairman Ben S. Bernanke earlier this week signaled the central bank is prepared to lower interest rates further to keep the economy out of a recession.

The decline in confidence ``points to slowing spending going forward,'' said Dana Saporta, an economist at Dresdner Kleinwort in New York, who forecast a final reading of 70.5. ``The combination of tighter credit conditions, falling home prices and an uncertain labor market argue for little or no spending growth until the tax-rebate checks come in, around mid- May.''

Economists had forecast the measure would fall to 70, according to the median of 55 projections in a Bloomberg News survey. Estimates ranged from 67.8 to 73.

The final Reuters/University of Michigan consumer confidence report for the month reflects about 500 responses, compared with the 300 households for the preliminary survey, which was released on Feb. 15.

The monthly gauge averaged 86.1 last year and has weakened in six of the past seven years since peaking at 112 in January 2000.

Consumer Spending

A separate report today showed consumer spending rose 0.4 percent in January, reflecting a jump in prices. After adjusting for inflation, spending stalled for a second month, Commerce Department figures showed. The Fed's preferred measure of inflation climbed 0.3 percent, the most in four months.

Consumers polled in the Reuters/University of Michigan survey said they expect an inflation rate of 3.6 percent in a year, compared with the 3.4 percent projected in January.

The expectations index, which some economists view as an indicator of future consumer spending, dropped to 62.4, also a 16-year low, from 68.1 last month. A measure of current conditions, which reflects Americans' perceptions of their financial situation and whether it's a good time to make big- ticket purchases like cars, declined to 83.8 from 94.4.

Bernanke Testimony

Bernanke, testifying to Congress earlier this week, referred to ``downside'' risks for the economy and noted that data since the last Fed meeting in January pointed to ``sluggish'' growth.

Central bank policy makers ``will be carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,'' Bernanke said in testimony to the House Financial Services Committee Feb. 27. He made the same remarks to the Senate Banking Committee yesterday.

Fed policy makers last month lowered their benchmark rate by 1.25 percentage point to 3 percent, including a three- quarters-of-a-point cut in an emergency meeting on Jan. 22. Central bankers are scheduled to next vote on the direction of interest rates March 18. Fed officials last month also cut their forecast for U.S. growth this year to 1.3 percent to 2 percent.

Jobs Report

The U.S. lost jobs for the first time in four years last month. The Labor Department is scheduled to release February's employment report on March 7.

This month, weekly initial jobless claims have remained elevated and the number of Americans continuing to stay on benefit rolls reached the highest level in more than two years, signaling that weakness in the labor market continues.

Outside of the labor reports, other releases are showing weakness in the housing market is spreading to other parts of the economy. Orders for U.S. durable goods fell 5.3 percent in January, the Commerce Department said Feb. 27, signaling businesses are cutting spending.

Higher energy and food bills also are hurting consumers' outlooks and contributing to them having increasingly less to spend on discretionary items. The price of regular-grade gasoline rose to an eight-month high of $3.152 on Feb. 26.

Consumers already are scaling back spending. Spending adjusted for inflation was unchanged in January for a second consecutive month, the Commerce Department reported today.

Target Corp., the second-largest U.S. discount chain, said earlier this week that revenue rose 0.8 percent in the quarter ended Feb. 2. Executives on a conference call said sales in the first half of this year would trail the latter part of 2007.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: February 29, 2008 10:28 EST