WASHINGTON (AP) – Americans’ incomes rose by 0.5 percent in March, the best showing in three months, and spending increased by 0.6 percent.

The Commerce Department reported Friday that the March income gain followed a 0.4 percent rise in February and a big 2.4 percent drop in January.

It was the best showing since a 3.7 percent surge in December, a month when the income figure soared because of a special dividend payment made by computer software giant Microsoft.

The 0.6 percent increase in consumer spending followed a 0.7 percent gain in February and no increase at all in January.

Both the rise in incomes and spending came in better than the 0.4 percent increases in both categories that economists had been forecasting.

Meanwhile, a report from the Labor Department on Friday showed that inflation pressures are not gaining ground in the labor market. Employee wages and benefits rose by just 0.7 percent in the first three months of this year, the smallest quarterly advance in six years.

The gain in the department’s Employment Cost Index followed a 0.8 percent rise in the fourth quarter of 2004.

It was below the 1 percent increase that economists had been expecting. It was the smallest quarterly increase since a 0.4 percent gain in the first three months of 1999.

Analysts said the moderation in wage and benefit costs should ease concerns that higher energy costs could trigger another wage-price spiral like the ones after the 1970 oil shocks.

“Well-contained wages means inflation should not accelerate sharply,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa.

The personal income and spending report also showed modest inflation with a price gauge favored by the Federal Reserve increasing by just 1.7 percent in March compared to the same month a year ago. The change in prices of personal consumption items excluding food and energy for the latest 12 months was only slightly higher than a 1.6 percent increase in February.

The modest readings on inflation helped spur a rally on Wall Street. The Dow Jones industrial average gained 122.14 points on Friday to close at 10,192.51.

The 0.6 percent increase in consumer spending during the month was led by a 2.2 percent jump in outlays for durable goods, such as autos and other items expected to last at least three years. Spending on nondurable goods was essentially flat during the month while spending on services, the biggest spending category, rose by 0.6 percent.

Disposable incomes, the amount left after paying taxes, rose by 0.5 percent in March.

Personal savings, represented as a percentage of disposable income, dropped to 0.4 percent in March, the lowest level for savings since a negative 0.2 percent savings rate in October 2001.

The government reported on Thursday that overall economic growth slowed to 3.1 percent in the first three months of this year, the weakest showing in two years, as consumers and businesses were jolted by higher energy costs.

Economists don’t believe the surge in energy prices this year will be enough to push the country into a recession, but they expect the country to endure a repeat of what Federal Reserve Chairman Alan Greenspan termed last year a “soft patch.”

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