Oct. 13 (Bloomberg) -- Consumer confidence in the U.S. jumped more than expected this month as gasoline prices fell and stocks rose, suggesting spending may gain momentum heading into the holiday shopping season.

The University of Michigan's preliminary index of consumer sentiment surged to 92.3, the highest since July 2005, from 85.4 in September. The gain was propelled by increasing optimism over the current state of the economy.

The rise may help buoy consumer spending, which accounts for about 70 percent of economic growth, even as the housing market stumbles, economists said. The drop in gasoline prices to almost eight-month lows is giving Americans extra cash to spend.

``People are responding to a tight labor market, lower energy prices and upbeat equity markets,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland. ``The consumer is by no means impaired. The energy-price issue has been huge the past few years, and so, for the near-term, that's good news.'

The biggest decline in gasoline service station receipts ever recorded led to an unexpected drop in retail sales last month that masked spending gains elsewhere, the Commerce Department reported today.

Sales decreased 0.4 percent following a 0.1 percent increase in August. Purchases increased 0.6 percent excluding service station receipts as consumers spent more at stores selling clothing, building materials and furniture.

Market Reaction

Treasury notes weakened and the dollar advanced as traders speculated that the numbers diminish the chances the central bank will reduce interest rates in coming months.

The Michigan index was expected to rise to 86.5, according to the median estimate of 57 economists in a Bloomberg News survey. Forecasts ranged from 83.5 to 90. Before today's report, the measure averaged 88.1 since monthly data were first compiled in 1978.

The expectations index, which some economists view as an indicator of future consumer spending, rose to 83.4 from a final September reading of 78.2.

A gauge of current conditions, which reflects Americans' perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, jumped to 106.1 from 96.6.

Inflation Expectations

Consumers in the Michigan survey said they expect an inflation rate of 2.9 percent in one year, compared with 3.1 percent in the September survey. The expected inflation rate over the next five years rose to 3.1 percent from 3 percent.

``Measures of inflation expectations would have to be considered disconcerting for the Fed,'' said Ted Wieseman, an economist at Morgan Stanley in New. ``Despite the complete collapse in gasoline prices the past two months, consumers' longer-term inflation outlook has remained sticky at a high level.''

The preliminary Michigan sentiment index is based on a telephone survey of about 300 households. The final report for the month, due Oct. 27, will reflect about 500 responses.

The average price of a gallon of regular gasoline fell to $2.25 on Oct. 11, the lowest since February, according to the American Automobile Association, the nation's largest motoring organization. The price was down almost 50 cents from the beginning of September.

More Money for Shopping

The decline leaves consumers with more money to spend heading into the holiday season, economists said.

Kohl's Corp., a low-price department-store company, last week reported its largest monthly sales gain in almost four years. The Menomonee Falls, Wisconsin-based company raised its third-quarter earnings forecast.

Consumers are also feeling wealthier as stocks rise. The Standard & Poor's 500 index is up about 2 percent so far this month and is 11 percent higher than the year's low reached on June 13.

Higher incomes may also help steady consumer spending. Workers' average hourly earnings last month rose 4 percent from September 2005, outstripping inflation and matching the biggest gain in five years.

Still, declining home sales and softening prices may temper consumer optimism. Sales of previously owned homes in the U.S. fell in August to the lowest since early 2004, and prices dropped from year-ago levels for the first time since 1995, a government report last month showed. Mortgage refinancing, which gave consumers extra cash during the housing boom, has also slowed.

Housing To Keep Sliding

The U.S. housing market will keep sliding the rest of the year, subtracting about 1 percentage point from second-half economic growth, and won't bottom out until mid-2007, David Seiders, chief economist at the National Association of Home Builders in Washington, said on Sept. 27.

A day earlier, Lowe's Cos., the second-largest U.S. home- improvement retailer, reduced its forecasts for profit and sales for the third time this year citing the cooling housing market.

Robert L. Johnson, the founder of Black Entertainment Television, owner of the National Basketball Association's Charlotte Bobcats and a director of Lowe's Cos., said he's still ``fairly optimistic'' about the long-term outlook for consumer spending.

``There are swings, but I'm fairly confident people will continue to spend at the level they did last year,'' Johnson said in an interview last week. ``Even though people are not buying homes, they still have existing homes they want to repair, they want to fix up, those kinds of things.''

To contact the reporter on this story: Joe Richter in Washington jrichter1@bloomberg.net

Last Updated: October 13, 2006 10:51 EDT