US consumer spending jumped last month but inflation accounted for half the gain, the government said, cementing expectations of a Federal Reserve interest rate rise this week.
Personal spending was up 1.0 per cent in May, the Commerce Department said, beating Wall Street forecasts for a 0.8 per cent gain and posting the biggest advance since October 2001's 2.4 per cent rise.
April's gain in spending was revised down slightly to 0.2 per cent from an originally reported 0.3 per cent. But the overall picture was of consumers making another solid contribution to US growth.
"The numbers show the economy is doing very well and inflationary pressures are slowly building," said Peter Frank, senior foreign exchange strategist at ABN Amro.
US Treasuries fell at the data as dealers focused on a higher-than-expected inflation reading, which may prompt the Fed to signal it will raise interest rates faster than expected when its two-day policy meeting ends today.
This also follows Friday's news of a rise in the core price index for consumer spending during the first quarter of 2004, published alongside a surprise downward revision in gross domestic product to 3.9 per cent from 4.4 per cent.
The benchmark 10-year note lost 22/32 in price, lifting its yield to 4.74 per cent from 4.65 per cent on Friday. On the stock market the Dow Jones industrial average was barely changed, ending down 0.14 per cent at 10,357.
Foreign exchange dealers were less perturbed, with the dollar hovering broadly unchanged in late New York trade against the euro at $1.2182, while analysts also found little in the data to cause alarm.
"The subdued core inflation is consistent with the Fed's measured pace on interest rates," ABN Amro's Frank said.
The Fed is expected to hike interest rates for the first time in 4 years, from their 1958-low of one per cent, at the end of their meeting this week.
Fed officials have said they can tighten monetary policy at a measured pace, but also want to assure markets that they will keep US inflation under control.
The latest personal income data showed inflation up last month, with the price index for consumer spending jumping 0.5 per cent following a revised 0.2 per cent climb in April.
The so-called core index, which strips out food and energy costs, rose 0.2 per cent after a 0.2 per cent increase the previous month.
"That (core price change) suggests that there is still very modest inflation which is a good sign for the economy," said Gary Thayer, chief economist at A.G. Edwards & Sons.
"We're still likely to see the Fed raise rates, but at a measured pace - 25 basis points this week and 25 basis points in either August or September," he said.
The year-on-year core inflation reading - a favourite of Federal Reserve Chairman Alan Greenspan - was a 1.6 per cent gain compared with an upwardly revised 1.6 per cent increase in April. This had originally been posted at 1.4 per cent, indicating that price pressures have built momentum.
Personal income rose 0.6 per cent in May, slightly ahead of forecasts for a 0.5 per cent rise and matching April's rise.
Economists said job growth was finally boosting US incomes.
"With upward revisions to previous months too, the recovery in employment is dramatically lifting income growth. Gross incomes are now up 5.8 per cent year-over-year, but the monthly trend suggests this rate will rise toward seven per cent through the second half," said Ian Shepherdson, chief US economist at High Frequency Economics.