WASHINGTON (Reuters) - U.S. consumer spending increased moderately in May and prices rose slightly, pointing to slowing economic growth and benign inflation pressures, which could give the Federal Reserve ammunition to cut interest rates next month.

Shoppers ride escalators at the Beverly Center mall in Los Angeles, California November 8, 2013. REUTERS/David McNew/File Photo

The report from the Commerce Department on Friday came just a week after the Fed signaled it could ease monetary policy as early as July, citing low inflation as well as growing risks to the economy from an escalation in trade tensions between the United States and China. Inflation has undershot the U.S. central bank’s 2 percent target this year.

“Below-target inflation is a concern for the Fed, but not the primary reason they are leaning toward cutting interest rates,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “The Fed has an easing bias because of growth concerns, and low inflation has only helped lower the bar for even further rate cuts.”

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% as households boosted purchases of motor vehicles and spent more at restaurants and on hotel accommodation. Data for April was revised up to show consumer spending advancing 0.6% instead of the previously reported 0.3 percent gain.

Last month’s increase in spending was in line with economists’ expectations.

Consumer prices as measured by the personal consumption expenditures (PCE) price index rose 0.2% last month as a 0.3%rebound in food prices was tempered by a 0.6% decline in the cost of gasoline and other energy goods. The PCE price index increased 0.3% in April.

In the 12 months through May, the PCE price index increased 1.5%, slowing from April’s 1.6% advance.

Excluding the volatile food and energy components, the PCE price index climbed 0.2% last month after a similar gain in April. That kept the annual increase in the so-called core PCE price index at 1.6% for a second straight month in May.

The core PCE index is the Fed’s preferred inflation measure. It hit the central bank’s 2% target in March 2018 for the first time since April 2012. The Fed last week downgraded its inflation projection for 2019 to 1.5% from the 1.8% projected in March. Fed Chairman Jerome Powell at his press conference did not refer to weak inflation as “transient.”

The low inflation projections were supported by a survey on Friday from the University of Michigan showing consumers this month expected slower price increases over the next 12 months compared to May. Consumers’ inflation expectations over a five-year period fell to 2.3% from 2.6% last month.

The dollar .DXY dipped against a basket of currencies. U.S. Treasury yields rose slightly as investors awaited crucial trade talks on Saturday between Washington and Beijing. Stocks on Wall Street were trading marginally higher.

LESS MOMENTUM

When adjusted for inflation, consumer spending rose 0.2% in May. This so-called real consumer spending increased by the same margin in April. The moderate increase in real spending in the last two months suggested consumer spending was struggling to accelerate after slowing sharply in the first quarter.

“It still looks like spending has firmed noticeably relative to the weak run around the turn of the year, but we now see less recent momentum than we had been expecting,” said Daniel Silver, an economist at JP Morgan in New York.

Consumer spending increased at a 0.9% annualized rate in the January-March quarter, the slowest in a year. The overall economy grew at a 3.1% rate last quarter, boosted by exports, an accumulation of inventory and government spending on highways and defense.

The tepid real consumer spending gain added to weak May reports on manufacturing, trade, job growth and the housing market in suggesting a deceleration in economic activity.

The manufacturing sector’s deepening troubles were underscored by a third report on Friday showing a measure of factory activity in the Midwest tumbled into contraction territory this month for the first time since January 2017.

The MNI Chicago Business Barometer decreased by 4.5 points to a reading of 49.7 in June. A reading below 50 indicates contraction in the region’s manufacturing. It added to other weak regional manufacturing surveys, including from the New York Fed, Richmond Fed and Philadelphia Fed.

“The evidence that renewed uncertainties about trade and tariff policies and the impact on global supply chains and capital spending is adversely affecting manufacturing activity continues to build with this report,” said John Ryding, chief economist at RDQ Economics in New York.

The economy is shifting into lower gear as last year’s stimulus from massive tax cuts and increased government spending fades. Following the consumer spending data, the Atlanta Fed slashed its second-quarter gross domestic product forecast by four-tenths of a percentage point to a 1.5% rate.

Last month, spending on goods increased 0.5%, with outlays on long-lasting manufactured goods such as motor vehicles surging 1.7%. Spending on services gained 0.4%.

Consumer spending in May was supported by a 0.5% rise in personal income, which matched April’s increase. Wages gained 0.2% after increasing 0.3% in April. Savings rose to $985.4 billion in May from $975.0 billion in the prior month.

“Decent income gains are supporting continued consumer spending, but weakness in wage increases remains a threat to growth,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.