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WRAPUP 2-U.S. consumer spending roars back, but inflation tame

(Adds details, analyst and White House comments, updates markets)

Consumer spending increases 0.9 percent in March

* Core PCE price index flat; rises 1.6 percent year-on-year

* Personal income up 0.1 percent; savings fall to $1.03 trln

By Lucia Mutikani

WASHINGTON, April 29 (Reuters) - U.S. consumer spending increased by the most in more than 9-1/2 years in March as households stepped up purchases of motor vehicles, but price pressures remained muted, with a key inflation measure posting its smallest annual gain in 14 months.

The surge in consumer spending reported by the Commerce Department on Monday sets a stronger base for growth in consumption heading into the second quarter after it slowed sharply in the first three months of the year.

It further allayed concerns about the economy's health, which had been brought to the fore by a temporary inversion of the U.S. Treasury yield curve last month. Tame inflation, however, supported the Federal Reserve's recent decision to suspend further interest rate increases this year.

Fed officials are scheduled to meet on Tuesday and Wednesday to assess the economy and deliberate on the future course of monetary policy. The U.S. central bank in March dropped forecasts for any interest rate increases this year, halting a three-year policy tightening campaign. The Fed raised borrowing costs four times in 2018.

"The economy is in a sweet spot for now with not enough inflation to cause the Fed to raise rates, and with inflation not low enough to worry Fed officials that economic demand is weakening, which could require rate cuts," said Chris Rupkey, chief economist at MUFG in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged 0.9 percent. That was the biggest rise since August 2009 and was also driven by increased healthcare expenditures. Spending rose 0.1 percent in February.

Data for January was revised up to show consumer spending rising 0.3 percent instead of the previously reported 0.1 percent gain. The release of the February spending data was delayed by a five-week partial shutdown of the federal government that ended on Jan. 25. Economists polled by Reuters had forecast consumer spending jumping 0.7 percent in March.

When adjusted for inflation, consumer spending increased 0.7 percent in March. This so-called real consumer spending was unchanged in February. The data was included in last Friday's first-quarter gross domestic product report.

March's surge in real consumer spending suggested an acceleration in consumption was likely in the second quarter. Consumer spending increased at a 1.2 percent annualized rate in the first quarter, the slowest in a year. The overall economy grew at a 3.2 percent rate last quarter.

The dollar was little changed against a basket of currencies, while U.S. Treasury prices fell. Stocks on wall Street rose, lifting the S&P 500 and the Nasdaq Composite to record highs.

INFLATION BELOW TARGET

In March, spending on goods rebounded 1.7 percent, with outlays on long-lasting manufactured goods such as cars shooting up 2.3 percent. Spending on goods fell 0.5 percent in February. Outlays on services increased 0.5 percent last month, driven by healthcare spending, after rising 0.4 percent in February.

Inflation was benign, with the personal consumption expenditures (PCE) price index excluding the volatile food and energy components unchanged in March after edging up 0.1 percent in February. That lowered the year-on-year increase in the so-called core PCE price index to 1.6 percent, the smallest increase since January 2018, from 1.7 percent in February.

The core PCE index is the Fed's preferred inflation measure. It hit the central bank's 2 percent inflation target in March last year for the first time since April 2012.

The low inflation readings caught the attention of the White House, where President Donald Trump has railed against the Fed for tightening monetary policy. Trump has called for rate cuts, tweeting earlier this month that there was "almost no inflation." The Trump administration blamed the economy's stumble at the turn of the year on the rate hikes.

On Monday, White House economic adviser Larry Kudlow said slowing inflation opened the door for possible rate cuts. Economists, however, are not convinced.

"These below-target rates of inflation will likely be acknowledged by the Fed at this week's meeting, but we still think it unlikely that the Fed would be prompted into rate cuts by weak inflation readings alone," said Jesse Edgerton, an economist at JPMorgan in New York.

With personal income ticking up 0.1 percent in March after rising 0.2 percent in February, there are concerns that the current pace of consumer spending might be unsustainable. Incomes have been almost flat since surging last December.

But a strong labor market and still very high savings are seen underpinning spending. Wages rose 0.4 percent in March after advancing 0.3 percent in the prior month. Savings fell to $1.03 trillion in March from $1.16 trillion in February.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)