By Lucia Mutikani
WASHINGTON (Reuters) - U.S. consumer spending barely rose and inflation was tame in July, offering a cautionary note on the economy as the Federal Reserve weighs cutting back its massive bond-buying program.
The Commerce Department said on Friday consumer spending ticked up 0.1 percent as outlays on services were flat and purchases of durable goods such as automobiles fell. Spending was also held back by weak incomes.
June's increase in consumer spending was revised up to 0.6 percent from a previously reported 0.5 percent.
Economists polled by Reuters had expected consumer spending, which accounts for about 70 percent of U.S. economic activity, to gain 0.3 percent last month.
The tepid demand dampened inflation pressures last month. A price index for consumer spending edged up 0.1 percent, slowing from a 0.4 percent increase in June. Over the past 12 months, prices rose 1.4 percent compared with 1.3 percent in June.
It was the biggest increase since February.
Excluding food and energy, the price index for consumer spending nudged up 0.1 percent after advancing 0.2 percent in June. Core prices were up 1.2 percent from a year ago, rising by the same margin for a fourth consecutive month.
Both inflation measures continue to trend below the Fed's 2 percent target. That, combined with the lacklustre consumer spending, would argue against the U.S. central bank trimming the $85 billion in bond purchases it is making each month to keep interest rates low.
Many economists, however, believe the Fed will make an announcement on the tapering at its September 17-18 policy meeting, starting off with a small cut to the bond-buying program, known as quantitative easing.
"This does nothing to alter our view of tapering. Fear of unquantifiable financial risks within a QE regime that offers diminishing returns is driving the policy agenda, not strong growth and inflation," said Eric Green, global head for rates, foreign exchange and commodity research at TD Securities in New York.
The dollar fell against the yen and trimmed gains versus the euro on the data.
Consumer spending last month adjusted for inflation was flat after rising 0.2 percent in June.
The unchanged reading in the so-called real consumer spending, which goes into the calculation of gross domestic product, added to data on residential construction, durable goods orders, industrial production and new home sales that have suggested the economy got off to a slow start in the third quarter.
The economy grew at a 2.5 percent annual pace in the second quarter, accelerating from a 1.1 percent rate in the first three months of the year. Consumer spending rose at a 1.8 percent rate in the April-June period.
It continues to be constrained by a sluggish wage growth. Last month, income ticked up 0.1 percent after rising 0.3 percent in June.
The weak wage growth was flagged in the July employment report, which showed a drop in hours worked and hourly earnings.
Both private and government salaries fell last month. With spending matching income growth, the saving rate - the percentage of disposable income households are socking away - held at 4.4 percent.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)