March 1 (Bloomberg) -- Personal spending in the U.S. increased more than forecast in January and the Federal Reserve's preferred price gauge accelerated, suggesting inflation will remain the central bank's biggest concern.

The 0.5 percent rise in spending followed a 0.7 percent December increase, the Commerce Department said today in Washington. The Fed's preferred measure of inflation rose 0.3 percent, the most in five months.

Gains in consumer spending, which accounts for more than two- thirds of the economy, are key to sustaining the expansion now that housing and manufacturing show few signs of rebounding. Federal Reserve Chairman Ben S. Bernanke yesterday said policy makers expect a pickup in growth later this year.

``Consumers are the one bright spot in the economy,'' Gina Martin, an economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. ``The Fed is still going to watch the inflation numbers with a critical eye.''

Incomes in January jumped 1 percent, boosted bonus payments and gains from stock options exercised at the start of the year, the Commerce Department said. The increase followed a 0.5 percent gain in December.

Economists forecast spending would rise 0.4 percent, according to the median of 74 estimates in a Bloomberg News survey. Estimates ranged from gains of 0.2 percent to 0.6 percent.

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.3 percent, the most since August, after a 0.1 percent gain the previous month. Some of the increase may have been due to a jump in medical care costs, economists said.

Inflation Accelerated

The measure rose 2.3 percent from January 2006, compared with December's 2.2 percent increase. Fed policy makers, including Bernanke, have said they'd be comfortable with increases in a 1 percent to 2 percent range.

The central bank kept the benchmark overnight lending rate at 5.25 percent for a fifth consecutive meeting on Jan. 31 and said ``some inflation risks remain.''

Adjusted for inflation, spending rose 0.3 percent, after a 0.4 percent increase the prior month, the report showed.

Because the increase in spending was smaller than the gain in incomes, the savings rate improved to minus 1.2 percent, from minus 1.4 percent the prior month. A negative rate suggests consumers are tapping savings to maintain spending.

Disposable income, or the money left over after taxes, rose 0.8 percent, after 0.5 percent the previous month. Disposable income was up 4.8 percent from January 2006.

Spending Breakdown

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, rose 0.7 percent after increasing 0.8 percent. Purchases of non-durable goods increased 0.1 percent. Spending on services, which account for almost 60 percent of all outlays, rose 0.4 percent.

The economy grew at an annual rate of 2.2 percent in the fourth quarter, extending a string of readings lower than 3 percent to nine months, revised figures from the Commerce Department yesterday showed. Growth has averaged 3.1 percent a quarter over the last decade.

``There's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year,'' Bernanke told lawmakers in Washington yesterday.

Former Fed Chairman Alan Greenspan today said a recession in the U.S. is possible, though not probable this year as excesses in inventory and housing are being reduced quickly, according to people attending a conference in Tokyo today.

Consumers Resilient

Consumer spending last quarter proved resilient to declines in housing and manufacturing. Purchases rose at an annual rate of 4.2 percent last quarter, after increasing at a 2.8 percent pace the previous three months, according to yesterday's report from the Commerce Department.

Spending this quarter is projected to grow at a 3 percent annual pace, according to the median estimate of economists surveyed by Bloomberg last month.

``We expect moderating, but still solid, consumer spending growth after a booming'' fourth quarter, David Hensley, an economist at JPMorgan Chase Corp. in New York, said before the report.

Earlier this week, the Conference Board's index of consumer confidence unexpectedly rose to the highest in more than five years, lifted by rising wages and an expanding job market.

Target Corp., the second-largest U.S. discount chain, this week said fourth-quarter profit got a boost from its biggest revenue gain in at least nine years as shoppers spent more on consumer electronics and groceries.

`Feel Very Good'

``I feel very good about the consumer,'' Federated Department Stores' Chief Executive Officer Terry Lundgren said Feb. 27 in an interview. Bloomingdale's, the company's high-end chain, also is ``doing very well.''

The housing slowdown is weighing on chains such as Home Depot Inc., the world's largest home-improvement retailer. The company's fourth-quarter profit plunged 28 percent as sales dropped for the first time in four years.

``We anticipate continuing headwinds in 2007,'' Chief Executive Officer Frank Blake said on a conference call last week. ``There is a lot of inventory to work through in housing. We are not terribly optimistic.''

Lowe's Cos., whose sales lag Home Depot, also reported a fourth-quarter profit decline on slower sales of home-improvement products, though it said business may start to pick up in the second half of the year.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: March 1, 2007 08:30 EST