WASHINGTON (MarketWatch) -- The windfall of cash from Washington in June got eaten up by the worst inflation in nearly three years, Commerce Department data showed Monday.

Nominal spending grew 0.6% on the month, but the increase was all due to higher prices, which spiked 0.8%.

Adjusted for inflation, June's real spending fell 0.2%, the first decline since February. Real consumer spending is up just 1.2% from a year ago, the weakest performance during this business cycle.

"Despite the fiscal stimulus, consumers are starting to pull back under the weight of tight credit, falling home values and a weakening labor market," wrote Michelle Meyer, an economist for Lehman Bros. "We expect this trend to continue."

Consumption will probably only rise at a 0.5% annual rate in the second half of the year, said Harm Bandholz, an economist for UniCredit Markets. "Soaring inflation, notably higher food and energy prices, has eaten up part of the fiscal payments."

The impact of the tax rebates on personal incomes was reduced in June: After getting $48.1 billion from the government in May, individuals received $27.9 billion.

Personal incomes rose 0.1% after a 1.8% surge in May.

Economists surveyed by MarketWatch had been looking for nominal spending to rise 0.5% and incomes to fall 0.1%. See Economic Calendar.

Real disposable incomes fell 2.6% in June, reversing gears after a 5.2% gain in May.

Congress approved some $110 billion in tax rebates in order to boost the flagging economy. It appears that consumers are spending some of the money, but much is being saved, at least for a while, as the personal savings rate jumped to 4.9% in May and 2.5% in June.

Inflation surged in June. The personal consumption expenditure price index rose 0.8% compared with May, the most since Hurricane Katrina hit in September 2005. Moreover, inflation's up 4.1% in the past year, the largest rate of growth in 17 years.

Core prices, which exclude food and energy prices, rose 0.3% in June. The increase was as expected.

Core prices thus are up 2.3% on a year-over-year basis, significantly higher than the 2% ceiling the Federal Reserve would like to see.

Details

Monday's data are likely to have little impact on the Federal Open Market Committee's meeting on Tuesday.

The Fed seems committed to keeping its interest-rate target steady at 2%, in an effort to balance the risks of a more severe economic slump against the risks that inflation could get out of hand. The June income and spending report highlights both sets of risks in bold letters.

Real spending on durable goods fell 1.6%, the biggest drop in a year, while real spending on nondurable goods slipped 0.4%. Real spending on services rose 0.2%.

Income from employee compensation rose 0.2%, while proprietors' income increased 0.6% and rental incomes rose 14.2%. Transfer payments fell 1.1% as income from assets dipped 0.2%.