* Consumer spending increases 0.4 percent in December
* Income rises 0.4 pct; savings fall to $351.6 billion
* Core PCE price index up 0.2 pct; up 1.5 pct year on year
WASHINGTON, Jan 29 (Reuters) - U.S. consumer spending rose solidly in December as demand for goods and services increased, but the gain came at the expense of savings, which dropped to a 10-year low in a troubling sign for future consumption and economic growth.
The Commerce Department said on Monday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.4 percent last month after an upwardly revised 0.8 percent increase in November.
Households continued to dip into savings to maintain spending amid sluggish income growth. Savings are now at levels last seen in December 2007, when the economy slipped into recession, and are a red flag for both consumer spending and economic growth.
The impact of low savings on consumer spending could, however, be temporarily offset by income tax cuts which came into effect in January.
Savings fell to $351.6 billion in December from $365.1 billion in the prior month. They declined to $485.8 billion in 2017, the lowest level since 2007, from $680.6 billion in 2016.
The saving rate dropped to 2.4 percent, the lowest level since September 2005, from 2.5 percent in November. It decreased to 3.4 percent in 2017, the lowest level since 2007, from 4.9 percent in 2016.
Personal income rose 0.4 percent last month after advancing 0.3 percent in November. Wages increased 0.5 percent last month. Income rose 3.1 percent in 2017, picking up from 2.4 percent in 2016.
Economists polled by Reuters had forecast consumer spending increasing 0.4 percent in December after a previously reported 0.6 percent rise in November. When adjusted for inflation, consumer spending rose 0.3 percent in December.
The U.S. dollar was trading higher against a basket of currencies. Prices of U.S. Treasuries and U.S. stock index futures were trading lower.
The data were included in the advance fourth-quarter gross domestic product report published on Friday. Consumer spending accelerated at a 3.8 percent annualized rate in the fourth quarter, the fastest in three years, after rising at a 2.2 pace in the third quarter.
Robust consumer spending helped to offset the drag from trade and inventories on the economy, which grew at a 2.6 percent rate in the fourth quarter. GDP increased at a 3.2 percent pace in the third quarter.
Last month, spending on long-lasting goods, such as motor vehicles, increased 0.7 percent. Outlays on services rose 0.5 percent, reflecting rising demand for utilities.
Monthly inflation ticked up in December. The Federal Reserve's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, rose 0.2 percent in December after a 0.1 percent gain in November.
The so-called core PCE increased 1.5 percent in the 12 months through December after a similar rise in November. The core PCE has missed the Fed's 2 percent target since mid-2012. (Reporting by Lucia Mutikani; Editing by Paul Simao)