Consumer spending (search) rose 0.5 percent in February as expected, government data showed on Thursday, while a key gauge of inflation (search) was up slightly more than forecast.

The Commerce Department (search) said the price index for consumer expenditure, a measure of inflation favored by Federal Reserve Chairman Alan Greenspan (search), climbed 0.3 percent after rising 0.2 percent in January. A Reuters poll of analysts had expected the PCE price index to show another 0.2 percent rise.

Personal income gained 0.3 percent, the Commerce Department said. Analysts had predicted personal income would gain 0.4 percent after it slumped 2.5 percent in January. January's data were distorted by a massive Microsoft dividend payment in December which has now washed out of the numbers.

Excluding inflation and taxes, real disposable income rose 0.1 percent, which compares with a 3.0 fall in January.

Analysts had expected consumer spending to advance 0.5 percent, from an upwardly revised 0.1 percent reading in January, buoyed by solid retail sales and a sharp rebound in expenditure on durable goods like cars.

Consumers have been the engine of the U.S. economy and consumer spending rose by 4.2 percent in the fourth quarter, according to final gross domestic product data released on Wednesday.

Investors are on alert for signs of higher prices after the Fed conceded last week that inflation risks had grown as it upped interest rates a quarter percentage point to 2.75 percent.

Thursday's numbers will keep markets guessing on inflation, with the year-ago change in the PCE price index in February creeping up to 2.3 percent from 2.2 percent the previous month.

Stripping out the volatile effect of food and energy prices, the core PCE index advanced 0.2 percent in February after increasing 0.3 percent the previous month. It stands 1.6 percent higher than February 2004.

Inflation is feeling the heat of soaring oil prices and analysts worry these could also dent household budgets, although evidence that this has dimmed the lusty appetite of American shoppers remains scant.

Spending on durable goods, which includes costly items like cars, grew 0.9 percent after a 3.7 percent drop in January. Nondurable spending advanced 0.6 percent after a 1.1 percent increase the previous month.