Consumer spending rose less than expected in January as households took advantage of the largest increase in incomes in more than 1-1/2 years to rebuild their savings, government data showed on Monday.

While the modest increase in spending, which accounts for 70 percent of economic activity, likely reflected some weather effects it also suggested spending would slow down after growing briskly in the final three months of 2010.

The Commerce Department said spending edged up 0.2 percent, the smallest increase in seven straight months of gains, after an upwardly revised 0.5 percent rise in December.

Economists polled by Reuters had expected a 0.4 percent rise in January. Real spending fell 0.1 percent, the first decline in a year, after rising 0.3 percent in December.

On net it really doesn't change much, spending will probably continue to be resilient, stronger than this number going forward as January was affected by being post holidays and with the weather being a factor there, said Sean Incremona, an economist at 4Cast in New York.

Stock index futures held gains after the data, while government bond prices were little changed. The U.S. dollar drifted lower against the euro, but rose against the yen.

Spending in the fourth quarter grew at a 4.1 percent annual rate, the fastest in more than four years.

Incomes rose 1.0 percent last month, the largest increase since May 2009, after increasing 0.4 percent in December. The jump in income partly reflected the tax package enacted last year.

The increase in January outpaced economists' expectations for a 0.4 percent gain. Savings jumped to $677.1 billion, the highest level since August, from $620.9 billion in December.

The report also showed the Federal Reserve's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy - edged up 0.1 percent last month, after being unchanged in December.

In the 12 months through January, the core PCE index rose 0.8 percent after rising by the same margin in December.

Fed officials prefer the core personal consumption expenditures price index as a gauge of consumer inflation because it takes into account changes in spending habits by households.

They have maintained their view that core inflation rates remain too low, even as high food and energy prices have put global central banks on alert for inflation.

Fed Chairman Ben Bernanke testifies to Congress on Tuesday and Wednesday, and analysts do not expect him to depart much from the central bank's view of low inflation.

(Reporting by Lucia Mutikani, Additional reporting by Karen Brettell in New York; Editing by Andrea Ricci)

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