* PCE price index rises 2.0 percent year-on-year in March
* Core PCE price index increases 1.9 percent from year ago
* Consumer spending up 0.4 percent month-on-month
WASHINGTON, April 30 (Reuters) - U.S. consumer prices accelerated in the year to March, with a measure of underlying inflation surging to near the Federal Reserve's 2 percent target as last year's weak readings dropped out of the calculation.
The rise in the annual inflation measures reported by the Commerce Department on Monday was anticipated by economists and Fed officials and is not expected to alter the U.S. central bank's gradual pace of interest rate increases.
Annual inflation readings in March of last year were held down by large declines in the price of cell phone service plans.
Consumer prices as measured by the personal consumption expenditures (PCE) price index jumped 2.0 percent year-on-year last month. That was the biggest gain since February 2017 and followed a 1.7 percent rise in February.
The PCE price index was unchanged on a monthly basis after advancing 0.2 percent in February.
Excluding the volatile food and energy components, the PCE price index soared 1.9 percent in the 12 months through March, the biggest increase since February 2017, after increasing 1.6 percent in February. The so-called core PCE price index rose 0.2 month-on-month in March after a similar gain in February.
The core PCE index is the Fed's preferred inflation measure. Last month's increase was in line with economists' expectations.
Minutes of the Fed's March 2021 policy meeting published this month showed officials expected the annual PCE price indexes to accelerate in March partly because of "the arithmetic effect of the soft readings on inflation in early 2017 dropping out of the calculation."
The minutes also noted that the rise in inflation emanating from the so-called base effects "by itself, would not justify a change in the projected path" for the central bank's benchmark overnight interest rate.
Fed officials are scheduled to convene on Tuesday and Wednesday for a regular policy meeting. The Fed raised rates last month and forecast at least two more rate hikes for this year.
The dollar slipped against a basket of currencies after the data. U.S. Treasury yields edged lower. U.S. stock index futures were trading higher.
TIGHTENING LABOR MARKET
Away from the favorable base effects, inflation is rising thanks to a tightening labor market. The government reported last Friday that wages and salaries recorded their biggest increase in 11 years in the first quarter.
Inflation is also likely to be fanned by an anticipated pickup in economic growth, driven by a $1.5 trillion tax cut package and increased government spending.
The Commerce Department's report on Monday also showed consumer spending increased 0.4 percent in March after being unchanged in February. The data was included in last Friday's advance first-quarter gross domestic product report.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 1.1 percent annualized rate in the January-March period, the slowest pace in nearly five years, after surging at a 4.0 percent pace in the fourth quarter.
As a result of the weakness in consumer spending, the economy grew at a 2.3 percent rate in the first quarter after expanding at a 2.9 percent pace in the final three months of 2017.
When adjusted for inflation, consumer spending increased 0.4 percent in March. The so-called real consumer spending fell 0.2 percent in February. The rebound in real consumer spending last month supports expectations that consumption was held back by temporary factors and will gain steam in the second quarter.
Consumer spending in March was lifted by a rise in purchases of long-lasting goods such as motor vehicles after two straight monthly declines. There were also increases in purchases of recreational goods.
Cooler temperatures in March boosted demand for heating, leading to a rise in household electricity and gas purchases.
Personal income rose 0.3 percent in March after increasing by the same margin in February. Wages gained 0.2 percent in March after rising 0.4 percent in the prior month.
With spending outpacing income, savings fell to $460.6 billion last month from $483.1 billion in February. The saving rate slipped to 3.1 percent from 3.3 percent in February. (Reporting by Lucia Mutikani Editing by Paul Simao)