Inflation remains contained and personal spending continued improving according to the latest report from the U.S. Commerce Department on Friday. Economists said the Fed will be pleased to see that consumers are holding in there despite weakness in the broader economy, though in real terms the 0.2% gain in personal spending was flat.

Sal Guatieri, senior economist at BMO Capital Markets, said the report supports the "stand-pat" policy of the Federal Reserve, as growth is moderate. Even though core inflation is below the Fed's estimates for this year, it's higher than their long-term unofficial target rate, he added.



Guatieri called it "concerning" that compensation fell 0.1% wages and salaries fell 0.2% in the month, noting that it "reflects weakness in the labour markets" and "provides a weak backdrop for consumer spending." He said the American consumer is already dealing with several fronts of headwinds, and they are now seeing the effects of job losses as well.

"It's difficult to see the U.S. consumer holding up for the balance of this year," he added.

Fixed income strategist T.J. Marta from RBC Capital Markets said the big picture is that there is "no resolution to the conflicting problems confronting a dual-mandated Fed. The consumer remains weak, and inflation remains problematic."

Charmaine Buskas, senior economics strategist from TD Securities, said the report is "a bit of good news to the hawks on the FOMC who are still fairly vocal about inflation risk as a policy concern." As spending increases and inflation cools, "the Fed seems well positioned to hold fire on further rate cuts for the time being," she added.

Marta said the 0.2% month-over-month increase in personal income was higher than expected, yet he noted such a gain "represents one of the weaker prints of the past 6 years."

Economists from Bear Stearns added that half of the increase in personal income came from higher rental income. They also said real PCE has started the second-quarter on an "anemic" note.

"Wage and salary income trends have been very weak recently and the more entrepreneurial nonfarm proprietors' income has been contracting. The Fed's preferred measure of core inflation remains well behaved, but we do not judge this to be a useful measure of inflation trends," they added.

The personal consumption expenditures (PCE) core deflator advanced by 0.1% (0.143%) in April, in line with expectations and contributing to a year-over-year change of 2.1% (2.091%).

By Patrick McGee and edited by Nancy Girgis