WASHINGTON (Reuters) - Consumer prices jumped at the sharpest rate in more than a quarter century during June, and consumers coping with soaring costs received their smallest income gain in a year, the government said on Monday.

The Commerce Department said personal incomes edged up 0.1 percent after rising 1.8 percent in May. June’s rise was the smallest since April 2007, when income was flat.

On a year-over-year basis, prices rose 4.1 percent in June, up from 3.5 percent in May, for the biggest annual gain since May 1991.

An inflation gauge tied to consumer spending jumped 0.8 percent in June, its steepest gain since a 1 percent rise more than 27 years ago, in February 1981.

“Household consumption surged in June but much of that went to purchase higher-priced food and energy,” said Joel Naroff, chief economist for Naroff Economic Advisors in Holland, Pa.

Separately, Commerce said June factory orders rose a bigger-than-forecast 1.7 percent after an upwardly revised 0.9 percent gain in May.

It was the strongest monthly gain in orders since last December and beat Wall Street economists’ forecasts of a 0.7 percent rise. But investors took their cue from the inflation data and concluded consumers were under growing pressure.

Stock prices fell modestly despite a drop in oil prices to $121.41 on the New York Mercantile Exchange. The Dow Jones industrial average, which had turned positive briefly in the afternoon, ended down 42.17 points at 11,284.15, while the Nasdaq composite index slipped 1.10 to 2,285.56.

U.S. Treasury debt prices were lower on concern that inflation might erode the value of longer-term securities. Benchmark 10-year Treasury note prices, which move inversely to their yield, traded down 6/32 for a yield of 3.97 percent, versus 3.94 percent late Friday.

The tiny rise in June incomes came as government stimulus payments eased to $27.9 billion from $48.1 billion in May. The department said that except for the stimulus payments, disposable incomes would have shrunk in June.

Incomes are under stress as job markets wither. A report on Monday from employment consulting firm Challenger, Gray & Christmas Inc. underlined the fact that employment prospects are likely to get worse.

It said planned layoffs at U.S. companies jumped 26 percent in July from June. Planned layoffs totaled 103,312 in July, compared with June’s 81,755, the survey found.

Another report from the Conference Board, a private business group in New York, showed its Employment Trends Index edged down to 112.1 in July from a revised 113.1 in June. That was consistent with last Friday’s Labor Department report showing employers cut payrolls for a seventh consecutive month in July.

A woman shops at the Macy's store at a mall in a Denver suburb May 16, 2008. REUTERS/Rick Wilking

The Commerce Department said consumer spending rose 0.6 percent in June after gaining 0.8 percent in May. But after accounting for inflation, consumer spending, which fuels two-thirds of national economic output, fell 0.2 percent.

The core PCE index, which excludes food and energy items, was up 2.3 percent in June, the highest since a matching rate last December, after rising 2.2 percent in May.

That will worry Fed policy-makers, who are expected to keep the federal funds lending rate at 2 percent but to sharpen a warning about the potential risk from rising prices.

Such a warning would help signal that the next rate move likely will be upward, but the timing of it is uncertain as the Fed balances the necessity of controlling inflation with the need to avoid further hurting a limping economy.

“Troubles with the financial sector, the economy, the U.S. consumer -- there’s no quick fix,” said Gail Dudack, chief investment strategist with Dudack Research Group in New York.

Doug Roberts, chief investment strategist with Channel Capital research in Shrewsbury, New Jersey, said the price data puts the U.S. central bank in a tough spot.

“It means there is some inflation leaking into the system, and it puts the Fed in a difficult position,” Roberts said. “But given the weakness of the economy, it means they’re going to have to tolerate more inflation than they like.”