By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer spending recorded its biggest increase in more than six years in April as households stepped up purchases of automobiles, suggesting an acceleration in economic growth that could persuade the Federal Reserve to raise interest rates soon.
Though other data on Tuesday showed an ebb in consumer confidence in May, spending is likely to remain supported by strong gains in house prices, as well as a strengthening labor market, which is steadily pushing up wages.
"This takes the Fed a step and a half closer to the next increase in interest rates," said John Ryding, chief economist at RDQ Economics in New York.
Fed Chair Janet Yellen said on Friday an interest rate hike would probably be appropriate in the "coming months," if the economy continued to pick up and the labor market added jobs. Her views were similar to those expressed in minutes from the Fed's April 26-27 policy meeting published recently.
The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged 1.0 percent last month as households bought a range of goods and services.
Last month's increase was the largest since August 2009 and beat economists' expectations for a 0.7 percent rise.
Strong consumption lifted inflation last month. The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, rose 0.2 percent after edging up 0.1 percent in March. That left the increase in the year-on-year core PCE rate at 1.6 percent.
The core PCE is the Fed's preferred inflation measure and is running below its 2 percent target. Economists expect inflation to continue creeping higher this year, citing the dollar's fading rally and a gradual increase in oil prices and wages.
Financial markets are pricing in a roughly 61 percent chance of an interest rate increase at the July 26-27 Fed policy meeting, according to CME FedWatch. The dollar was trading higher against a basket of currencies, while U.S. stocks fell. Prices for U.S. government debt were little changed.
When adjusted for inflation, consumer spending shot up 0.6 percent, the biggest gain since February 2014, after being flat in March.
The strong consumer spending report joined data on goods exports, industrial production, housing starts and home sales in suggesting the economy was regaining momentum after growing at a lackluster 0.8 percent annualized rate in the first quarter.
The Atlanta Fed is currently forecasting gross domestic product rising at a 2.9 percent rate in the second quarter.
The brightening economic outlook was dimmed somewhat by a separate report from the Conference Board showing its consumer confidence index slipped to 92.6 this month from a reading of 94.7 April.
Households also had a less favorable view of the labor market. The share of respondents saying jobs were "plentiful" was little unchanged at 24.3 percent, while those reporting that jobs are "hard to get" increased to 24.4 percent from 22.8 percent in April.
Still, households continued to expect their incomes to increase.
In a third report, the Institute for Supply Management-Chicago said its business index fell 1.1 points to a reading of 49.3 in May, indicating a contraction in manufacturing activity in the Midwest. The decline mirrors other regional surveys and suggests national factory activity likely slumped in May after two straight months of growth.
Despite the retreat in consumer confidence and weakness in manufacturing, rising incomes and higher house price are likely to prop up consumption. A fourth report showed the S&P/Case Shiller composite home price index of 20 metropolitan areas rose 5.4 percent in March from a year ago.
"Consumer spending will continue to lead economic growth in 2016, as more jobs, rising wages and house prices give households more money to spend," said Gus Faucher, deputy chief economist at PNC Financial in Pittsburgh.
Last month, consumer spending was buoyed by a 2.3 percent jump in purchases of long-lasting manufactured goods, with automobiles accounting for most of the increase. Purchases of nondurable goods surged 1.4 percent and spending on services increased 0.6 percent.
Personal income increased 0.4 percent last month after rising by the same margin in March. Wages and salaries rose 0.5 percent after advancing 0.4 percent in March.
With spending outpacing income, savings fell to $751.1 billion last month from $809.4 billion in March.
U.S. personal consumption http://link.reuters.com/haf65v U.S. PCE price index and the Fed funds target rate http://link.reuters.com/qec92t Core inflation divergence: CPI vs. PCE http://tmsnrt.rs/1QoX3pE U.S. home prices (Case-Shiller interactive) http://tmsnrt.rs/23LEcIe Consumer confidence interactive http://tmsnrt.rs/1qUmtAm Consumer confidence: jobs http://link.reuters.com/pum27v Consumer confidence: business conditions http://link.reuters.com/fec37v The U.S. consumer: Ipsos, Umich, Conference Board http://reut.rs/1IV1MXu ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting By Lucia Mutikani; Editing by Andrea Ricci)
U.S. personal consumption http://link.reuters.com/haf65v
U.S. PCE price index and the Fed funds target rate http://link.reuters.com/qec92t
Core inflation divergence: CPI vs. PCE http://tmsnrt.rs/1QoX3pE
U.S. home prices (Case-Shiller interactive) http://tmsnrt.rs/23LEcIe
Consumer confidence interactive http://tmsnrt.rs/1qUmtAm
Consumer confidence: jobs http://link.reuters.com/pum27v
Consumer confidence: business conditions http://link.reuters.com/fec37v
The U.S. consumer: Ipsos, Umich, Conference Board http://reut.rs/1IV1MXu
(Reporting By Lucia Mutikani; Editing by Andrea Ricci)