U.S. consumer spending slowed in July, suggesting the American economy will weaken with the end of government stimulus payments.

Personal consumption increased by 0.2% compared to the month before, the U.S. Commerce Department said today. June spending went up an unrevised 0.6%.

Personal income decreased at a seasonally adjusted rate of 0.7% compared to the month before. Income rose an unrevised 0.1% during June. The drop was the biggest since 2.3% in August 2005.

For July, economists had forecast a 0.4% decrease in personal income and a 0.2% climb in consumer spending.

Consumer spending makes up about 70% of U.S. gross domestic product. Climbing prices helped elevate spending last month. In fact, when adjusted for inflation, spending in July fell 0.4%.

Today’s data revealed a price index for personal consumption expenditures rose 0.6% in July compared to the prior month; it rose 0.7% in June.

Compared with a year earlier, the PCE price index climbed 4.5% in July. The year-over-year climb in June was 4%.

The PCE price index excluding food and energy, or core PCE, rose 0.3% a second month in a row during July. Year over year, it climbed 2.4% in July, after increasing 2.3% in June.

The U.S. Federal Reserve watches the year-over-year PCE price index excluding food and energy closely for signs of problematic inflation. Fed officials define their statutory goal of price stability as inflation of 1.5% to 2%.

U.S. government economic stimulus payments boosted the level of personal current transfer receipts by a mere US$4.2 billion, at an annual rate, in July. The payments gave much larger boosts of US$149.9 billion in June and US$179.6 billion in May. The stimulus payments started going out in the end of April and lasted until about the middle of July.