Consumer spending rose 0.5 per cent in June compared with May, when spending was up 0.2 per cent, the Commerce Department reported Friday. It was the best gain since a 0.7 per cent rise in February.
Income growth slowed to a 0.3 per cent rise in June, weaker than May's 0.4 per cent gain.
The hope is that strong consumer spending will help boost a lacklustre economy to faster growth in the second half of this year. But for that to happen, economists say income growth needs to accelerate.
Spending on non-durable goods was up 1.3 per cent, reflecting in part rising gas prices, while demand for durable goods rose 0.8 per cent, reflecting strength in auto sales.
The combination of faster spending and slower income growth pushed the savings rate down slightly in June to 4.4 per cent of after-tax income. It had been at 4.6 per cent of after-tax income in May. The savings rate stood at 5.6 per cent for all of 2012, indicating that consumers are trimming their savings to finance spending in the face of weak income growth.
A gauge of inflation tied to consumer spending showed that prices excluding volatile food and energy rose 1.2 per cent over the past year, the lowest gain since a 1.1 per cent rise in March 2011.
The Federal Reserve has a target of 2 per cent for inflation. The fact that inflation is falling below that target has prompted some Fed officials to be concerned about a potential bout of deflation. That would be harmful to economic growth because consumers could stop spending in the belief that prices will fall more.
Consumer spending is closely watched because it drives roughly 70 per cent of economic activity.
In the April-June quarter, the economy grew at a 1.7 per cent annual rate, marking the third straight quarter of lacklustre growth.
But economists are hoping that growth will rebound in second half of the year to a more respectable annual rate of around 2.5 per cent. That forecast is based on a belief that the adverse effects of federal tax increases that took effect in January and the government spending cuts that began in March will be less of a drag in the second half of the year.
Consumer spending has held up better than analysts had expected so far this year, growing at an annual rate of 2.3 per cent in the January-March quarter, the best showing in a year, and then slowing to a rate of 1.8 per cent in the spring.
Consumer confidence fell only slightly in July, staying close to a 5 1/2-year high. Economists say that steady job growth and rising home prices are helping to make Americans feel more comfortable about the future.
But consumers did spend cautiously at most retail establishments in June although sales at car dealerships remained strong.
Extremely low inflation has given the Federal Reserve the leeway to keep interest rates at record low levels through its power to manage short-term rates and its $85 billion per month in bond purchases which are designed to keep downward pressure on long-term rates.
The Fed announced after a two-day policy meeting this week that it planned to keep buying bonds at the $85 billion per month level. It also downgraded its views on the economy a bit, saying it saw growth moving ahead at a modest pace, compared to the June meeting when it saw growth at a moderate level.