U.S. consumer spending posted a smaller-than-expected rise in March and more of each shopping dollar paid for price hikes instead of products, a government report showed Friday.

Personal spending rose 0.4 percent in March, the Commerce Department (search) said, well below market expectations of a 0.7 percent gain. Adjusted for inflation, so-called real spending advanced a meager 0.1 percent.

While spending was softer in March than analysts had predicted, the department bumped up readings on spending in the prior two months.

Prices for U.S. bonds moved higher and the euro gained on the dollar as investors bet the softer-than-expected figures did little to further build a case for summer interest rate hikes.

The government said on Thursday consumer spending advanced at a 3.8 percent annual rate in the first quarter, helping fuel a solid 4.2 percent increase in U.S. gross domestic product. The GDP report incorporated the spending data released Friday.

Friday's report showed inflation picked up a bit last month, with a price index for consumer spending advancing 0.3 percent. The so-called core index, which strips out food and energy costs, rose 0.2 percent.

Both readings were a touch higher than in February.

The pickup in prices pushed the year-on-year core inflation reading -- a favorite of Federal Reserve (search) Chairman Alan Greenspan (search) -- to a gain of 1.4 percent, the biggest rise in just over a year.

Signs of mounting inflation pressure amid strong economic growth has fueled expectations in recent weeks that the Fed is nearing the day it will nudge up overnight borrowing costs from their current 1958 low of 1 percent.

For the first quarter as a whole, the department said Thursday the core index rose at a 2 percent annual pace, the sharpest gain since a matching rise in the third quarter of 2002.

The Fed meets on Tuesday to mull interest-rate policy. While policy-makers are expected to hold fire, analysts say they will begin to lay the rhetorical ground work for a rate hike that many are betting will come in August.

While spending disappointed, personal income rose 0.4 percent in March, slightly higher than expected on Wall Street. Factoring in the tax burden, disposable income was also up 0.4 percent. But when inflation is taken into account, disposable income gained just 0.1 percent.

Patrick Fearon, an economist at A.G. Edwards & Sons in St. Louis, said the overall rising trend in incomes suggested consumer spending could continue to provide support for the recovery.

"If you look at personal income compared to where it was a year ago, it's up 4.9 percent, and that's quite a bit more than inflation," Fearon said. "That suggests that consumers have increased purchasing power compared with last year."

The rise in income in March reflected a big 1.9 percent jump in proprietor's income, and just a small 0.2 percent increase in wages.

The personal saving rate, which measures the percentage of disposable income socked away, held steady at 1.9 percent.