According to the Commerce Department, spending by U.S. consumers slowed sharply in July, as the personal income fell and at the same time the impact of the tax rebates faded and inflation mounted.

In July, the personal income dropped 0.7 percent, the sharpest decrease since a 2.3 percent plunge in August 2005. Consumer spending rose 0.2 percent in the month of June, the weakest gain since February.

On the inflation front, consumer income slipped 1.7 percent in July, a 2.6 percent decline in the prior month. Spending dropped 0.4 percent, extending a 0.1 percent decline in June. The July inflation-adjusted decline was the deepest drop since June 2004. Price-adjusted purchases of durable goods, such as autos, furniture and other long-lasting items, dropped 1.6 percent and spending on non-durable goods decreased 0.9 percent. And services, which account for almost 60 percent of all outlays were unchanged.

Despite, consumers confidence hit its highest in five months in August, thanks to recovered energy prices. According to the Reuters/University of Michigan Surveys of Consumers, the final index of confidence for August rose to 63.0, its highest since March. In July it was 61.2.

“Consumers are certainly worried about the job and housing markets but lower gasoline prices have given them some tangible relief and we are seeing that relief expressed in the various consumer confidence figures,” said Lynn Reaser, chief economist at Bank of America Capital Management in Boston.

However, an economist named Ian Shepherdson, in High Frequency Economics in Valhalla, New York said, “With the tax refund effect on spending now more or less over, we think the worst is yet to come for consumers.”

According to reports, the government issued $13.7 billion stimulus checks to U.S. households in July, which was about half of the amount sent out in June. However, by the end of July, only $90 billion had been delivered as part of the effort to put an extra $107 billion in consumers’ hands this year.

Consumer prices jumped by a 0.6 percent last month, pushing the year-on-year rise in the personal consumption expenditures (PCE) price index up to 4.5 percent, the biggest 12-month gain since February 1991.

The increase was due to the fast rising in food and energy prices. Even if it excludes the food and fuel prices, it climbed 0.3 percent from June and were up 2.4 percent over the past year, which was the biggest annual gain since February 2007.

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