Shoppers checkout at a Target store in Falls Church, Virginia May 28, 2010. U.S. consumer spending was unexpectedly flat in April but real disposable incomes recorded their biggest increase in nearly a year a government report showed on Friday. REUTERS/Kevin Lamarque

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumer spending fell for the first time in a year in April after two months of solid gains, but the decline is likely temporary given a strengthening jobs market.

The Commerce Department said on Friday consumer spending dipped 0.1 percent, which was the first decline since April 2013. But the drop followed an upwardly revised 1.0 percent jump in March that was the largest gain since August 2009.

"The disappointing spending report should be viewed in the context of a stronger handoff into the second quarter," said Gennadiy Goldberg, an economist at TD Securities in New York. "We look for ongoing labor market progress to encourage further growth in consumer spending."

Last month's decrease, which was driven by weak spending on durable goods and utilities, did not change expectations economic growth would top a 3 percent annual pace this quarter after output shrank in the first three months of the year.

A separate report showed consumer sentiment slipped in May as households worried about income, but that too was viewed as temporary in light of the steady labor market improvement.

The Thomson Reuters/University of Michigan's consumer sentiment index fell to 81.9 in May from 84.1 in April, but was up slightly from earlier in the month.

Another report from the Institute for Supply Management-Chicago showed factory activity in the U.S. Midwest reached its highest level in seven months in May, boosted by a surge in new orders. Order backlogs jumped to a three-year high and inventories rose for a second consecutive month.

"It provides more evidence that the economy and manufacturing are in an upswing, and points to rising employment," said John Ryding, chief economist at RDQ Economics in New York.

U.S. Treasury debt prices fell on the mixed data, while the dollar slipped against a basket of currencies. U.S. stocks were slightly lower.





INFLATION CREEPING UP

The report on consumer spending provided the latest evidence that inflation was starting to stir.

Prices rose 0.2 percent in April, pushing the year-on-year reading up to 1.6 percent - the largest gain since November 2012. It had advanced 1.1 percent in March.

Excluding food and energy, prices increased 0.2 percent. These so-called core prices were up 1.4 percent from a year ago, the biggest increase since March 2013.

The pick-up is welcome news for Federal Reserve officials, who have been worried that inflation was running so far below the central bank's 2 percent target.

Weak medical care costs has kept inflation down but that anchor is slipping away. Economists say a rise in those costs plus increasing rents should lift inflation this year and pave the way for an interest rate hike from the Fed. (Full Story)

"We believe the inflation backdrop will keep the Fed on a gradual path to normalization and look for the first rate increase in June 2015," said Michael Gapen, an economist at Barclays in New York.

The Fed has held benchmark overnight interest rates near zero since December 2008.





(Reporting by Lucia Mutikani; Editing by James Dalgleish and Paul Simao)