June 11 (Bloomberg) -- The Federal Reserve said economic growth was ``generally weak'' in April and May as consumer spending slowed, while manufacturers in several regions passed on higher raw materials costs to their customers.

Three of the 12 regional Fed banks reported ``softer, weaker or lower'' growth and four found ``slower, sluggish or modest'' expansion. Five areas reported business was ``stable or little changed,'' the central bank said in its regional Beige Book economic survey.

The report indicates the economy is slowing, though avoiding a contraction, an assessment that echoes Chairman Ben S. Bernanke, who said this week dangers of a deeper downturn are receding. The release didn't sway investors from betting that the Fed will raise interest rates by year-end to stem inflation.

``There is not quite the degree of softness that we saw in the previous Beige Book,'' said David M. Jones, president of DMJ Advisors LLC in Denver and author of four books on the central bank. That ``allows the Fed to pay greater attention to these inflation expectations'' among consumers.

The number of districts reporting no further deterioration in the economy more than doubled from three in the previous survey, released April 16. Today's report, which is named for the color of its cover, was based on information gathered from late April until June 2.

Fed Meeting

The anecdotal reports are part of a package of analysis and data that will be used by Fed policy makers as they decide on interest rates at their meeting June 23-25.

Bernanke and other officials have indicated this month that inflation is increasingly a concern, and that the slow economic growth that policy makers anticipate won't spur further rate cuts. The Fed chief said June 9 that the rate-setting Federal Open Market Committee ``will strongly resist an erosion of longer-term inflation expectations.''

Fed officials cut the benchmark interest rate 2.25 percentage points in the first four months of the year, to 2 percent, the fastest reduction in two decades. Traders project no change at this month's meeting, according to futures prices, and a 54 percent chance of an increase in August.

Households have been hit by soaring fuel costs and a slump in home values. Manufacturers have fared better because of record demand for U.S. goods and services abroad.

`Pinched' Consumers

``Consumer spending slowed since the last report as incomes were pinched by rising energy and food prices,'' the Beige Book said. ``Business contacts in most districts reported moderate or limited wage growth in response to some loosening of labor market conditions.''

``The Fed has to be worried about the suction of purchasing power out of the wallets of Americans caused by the seemingly unending rise'' in oil prices, said Alan Blinder, a Princeton University professor and former Fed Board vice chairman. ``That's more and more purchasing power that could and should be spent on other things.''

The economy expanded at a 0.9 percent annual pace in the first quarter, capping off the weakest six month expansion in five years, the Commerce Department reported May 29. As growth slowed, private employers cut payrolls every month since December, pushing the jobless rate up to 5.5 percent in May.

``Reports of softer demand for housing-related products remained widespread,'' the Beige Book said. ``Many districts cited higher production costs and cuts in employment that contacts attributed to slumping home sales and construction.''

Inflation Outlook

Slowing growth hasn't stopped consumers from anticipating higher prices. A gauge of household expectations for price gains over five years climbed to a 13-year high last month, according to a Reuters/University of Michigan Survey. The consumer price index rose 3.9 percent for the 12-month period ending April.

``It is very important to ensure that policy actions anchor inflation expectations'' and thereby help contain price gains, Fed Vice Chairman Donald Kohn said in a speech today at a Boston Fed conference in Chatham, Massachusetts.

Dallas Fed president Richard Fisher and St. Louis Fed chief James Bullard also said this week the central bank may need to raise interest rates to stem a surge in the expected inflation rate.

Still, the Beige Book reported that ``retail price reports were mixed.''

Record energy costs have caused price pressures to build. Crude oil prices rose have more than doubled in the past 12 months, reaching a record of $139.12 a barrel on June 6.

The Beige Book's regional anecdotes are gathered through hundreds of telephone calls, news clippings and personal contact by the staff of the 12 Fed banks, whose districts cover all 50 U.S. states. The anecdotes are designed to supplement quantitative forecasts of the Board of Governors staff.

Today's report was prepared by the Richmond Fed, based on information collected on or before June 2, 2008.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

Last Updated: June 11, 2008 16:39 EDT