Growth in personal incomes outpaced a modest increase in U.S. consumer spending in May, the government said in a report on Friday.

The Commerce Department (search) said income grew by 0.3 percent in May, after being up a revised 0.2 percent in April. Consumer spending, which accounts for about two-thirds of economic activity, posted a modest 0.1 percent gain in the month.

May marked the second month in a row that income growth outpaced spending, which allowed the personal saving rate, the percentage of income left over after expenses, to rise to 3.5 percent, the highest since February's 3.9 percent.

The numbers showed a cautious but relatively strong U.S. household sector (search). While the spending data came in slightly below Wall Street expectations, the income numbers should ease worries about family balance sheets. With incomes expected to rise in coming months, spending should also perk up, analysts say.

The report also showed inflationary pressures well in check. The price index for personal spending fell for a second straight month, dipping 0.1 percent overall and was unchanged excluding volatile food and energy prices.

For the 12 months ended in May, the overall index was up only 1.7 percent and the "core" index rose 1.2 percent. Excluding a 1.0 percent rise in the 12-month period ending September 2001, the rise in the core price index through May was the smallest since October 1965.

Federal Reserve (search) officials in recent weeks have expressed more concern about further decreases in inflation, one factor that led the central bank to cut its key federal funds rate by a quarter percentage point on Wednesday.

"The probability, though minor, of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation from its already low level. On balance, the Committee believes that the latter concern is likely to predominate for the foreseeable future," the Fed said.

On Thursday, the Commerce Department reported the U.S. economy grew at an anemic 1.4 percent annual rate in the first three months of 2003, matching the slow rate of growth in the final quarter of 2002.

That pace may pick up in the second quarter if spending is maintained. Adjusted for inflation, consumer spending was up a healthy 0.3 percent for a second straight month in May.

Analysts are optimistic that the combination of continued low interest rates and the initial effects of a $350 billion tax cut package will boost economic growth in coming months.

In mid-June, the Internal Revenue Service (search) mailed new tax withholding tables to employers, which are to be used no later than July. The Treasury Department (search) said the withholding changes are expected to put about $22 billion into the economy this year. In addition, about 25.4 million checks totaling about $13 billion are to be mailed to middle-class families with children in late July and early August as advance payments for child tax credits expected to be claimed during next spring's tax filing season.