updated 10/27/2006 12:00:48 PM ET 2006-10-27T16:00:48

U.S. consumers' mood brightened by more than expected in October, a report showed on Friday, as their view of both future and current conditions improved on the back of lower gasoline prices.

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The final October reading of the University of Michigan's consumer sentiment index was 93.6, up from a preliminary 92.3 and September's final 85.4, said sources who saw the subscription-only report.

The median forecast of Wall Street economists polled by Reuters was for a final October reading of 92.5.

"The consumer is doing OK. The housing market is OK and the consumer has been helped by lower prices at the pump and energy prices, while the employment numbers are still good. We will continue to see the consumer contribute here," said David Straus, portfolio manager at Johnston Lemon Inc. in Washington.

The survey's index of current conditions climbed to a final 107.3 in October from a preliminary 106.1 and from 96.6 in September, while consumer expectations rose to 84.8 from a preliminary 83.4 and 78.2 in September.

Consumer spending accounts for about two-thirds of U.S. economic activity but in recent years confidence measures have been a weak guide to actual spending.

Expectations for inflation were virtually unchanged from September, the report said, according to the sources.

The survey's final October reading on one-year U.S. inflation expectations was 3.1 percent, up from a preliminary 2.9 percent, but unchanged from 3.1 percent in September.

Median expectations for inflation over a five-year horizon were unchanged from early October at 3.1 percent but were fractionally higher than September's 3.0 percent.

Government bonds were little moved by the data, with prices holding at higher levels after an early boost from surprisingly weak preliminary data on third quarter U.S. gross domestic product growth.

The first reading of third-quarter GDP showed a 1.6 percent increase, falling short of an expected 2.2 percent rise and below the 2.6 percent advance of the second quarter.

"There is this exhaustion about which way the economy is going right now, or maybe it's contentment that yields are where they need to be right now," said T.J. Marta, fixed income strategist at the Royal Bank of Canada Capital Markets in New York.

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