(REUTERS) -- Consumer spending was flat in December as households took advantage of the largest rise in income in nine months to boost their savings, setting the tone for a slowdown in demand early in 2012.

It was the weakest reading on spending since June, the Commerce Department said on Monday. Economists had expected consumer spending, which account for more than two-thirds of U.S. economic activity to nudge up 0.1 percent, the same as in November.

For all of 2011, spending rose 4.7 percent, the largest increase since 2007.

Despite the healthy gains in income, U.S. consumers appear to have rediscovered a new sense of frugality, said Millan Mulraine, an economist at TD Securities.

When adjusted for inflation, spending dipped 0.1 percent, breaking three straight months of gains. It increased 0.1 percent in November.

The government reported on Friday that consumer spending grew at a 2.0 percent annual pace in the fourth quarter, helping to lift gross domestic product 2.8 percent - an acceleration from the third-quarter's 1.8 percent rate.

Part of the spending, which has been concentrated in motor vehicles, has been funded from savings and credit cards as high unemployment constrains wage growth.

Wages rose last month, helping to prop-up incomes. Income advanced 0.5 percent, the largest gain since a matching increase in March, and followed a 0.1 percent rise in November. Economists had expected income to rise 0.4 percent.

Taking inflation into account, disposable income rose 0.3 percent after being flat the prior month. With disposable income outstripping spending, the saving rate rose to a four-month high of 4.0 percent from 3.5 percent in November.

Savings increased to an annual rate of $460.1 billion, also the highest since August, from $407.8 billion the prior month.

The report showed inflation pressures generally contained, with a price index for personal spending nudging up 0.1 percent after being flat the prior month.

In the 12 months through December, the PCE index was up 2.4 percent - the smallest gain since April 2011 - slowing from November's 2.6 percent rise.

A core inflation measure, which strips out food and energy costs, rose 0.2 percent last month after gaining 0.1 percent in November.

In the 12 months through December, core PCE rose 1.8 percent - the largest rise since March 2010 - after advancing 1.7 percent in November.

The Federal Reserve would prefer to see this measure nearer its 2 percent inflation target.

The U.S. central bank last week said it expected to keep interest rates at rock bottom levels at least through late 2014, and it warned the economy still faced big risks.

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