WASHINGTON (AFP) - US consumer spending cooled sharply and personal incomes fell in July as the stimulus of tax rebates wore off and inflation mounted, the Commerce Department said Friday.

Spending rose 0.2 percent in July from June, the weakest gain since February, while personal incomes slid 0.7 percent, the steepest drop since August 2005.

Spending was in line with most analysts' forecasts but the decline in incomes was sharply steeper than the 0.2 percent expected.

In June, consumer spending rose 0.6 percent and incomes edged 0.1 percent higher, according to data the department left unrevised.

Disposable incomes after taxes fell 1.1 percent in July, after falling 1.9 percent in June.

On the inflation front, the personal consumer expenditure (PCE) price index rose 0.6 percent, cooling slightly from a 0.7 percent monthly rise in June.

Core PCE, excluding food and energy prices, rose 0.3 percent, mirroring June's gain.

On a 12-month basis, inflation steadily mounted. The July headline PCE was 4.5 percent, compared with 4.0 percent in June, and was the highest price rise since February 1991.

The rise in core PCE was more moderate, up 2.4 percent in July from 2.3 percent June. Still, the July core reading was the highest since February 2007.

The PCE index is closely watched by the Federal Reserve for a reading on inflation in the world's largest economy, where consumer spending fuels two-thirds of activity.

Several Fed policy makers have expressed concern in recent months about building inflationary pressures but the central bank has chosen to focus on the threat of recession as the economy faces stiff headwinds from a housing crisis and tight credit.

Most analysts expect the Fed to hold its base interest rate at a low 2.0 percent until 2009.

Inflationary pressures weighed on consumer spending and personal incomes in July.

In data adjusted for inflation, consumer income dropped 1.7 percent in July, following a 2.6 percent decline in the prior month. Spending slipped 0.4 percent, extending a 0.1 percent decline in June. The July inflation-adjusted decline was the strongest since June 2004.

Personal saving fell to 1.2 percent of disposable income from 2.5 percent in June.

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