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Personal income rose 0.7% in April, in line with expectations, but consumer spending increased 0.6%, below forecasts for a 0.8% gain, the Commerce Department reported.

While spending on goods remained brisk, spending on services rose a mere 0.1%. Soaring gasoline prices took their toll, economists say. According to Ian Shepherdson, chief U.S. economist at High Frequency Economics, spending growth is likely to continue dipping to 3.2% in the second quarter, from 3.6% in the first quarter.

As if to highlight that point, consumer confidence continued to drop in May. The University of Michigan said its index of consumer sentiment dipped to 86.9, a two-year low, from 87.7 in April. The university's previous estimate pegged the index at 85.3.

The economic data triggered a muted reaction in the equities market amid light volume and profit-taking pressures ahead of the three-day Memorial Day holiday.

Bond pits initially cheered the economic data, which again reinforced the view that inflation pressures remain contained. The inflation gauge in the April income and spending data rose 0.4% due to soaring gasoline prices. But core inflation, which excludes food and energy, rose just 0.1%. That brought the year-on-year gain in core inflation down to 1.6% in April from 1.7% in March.

Preholiday lethargy returned to bonds as the morning progressed and the 10-year note was recently down 1/32 to yield 4.08%.

Given the huge impact of soaring energy prices over the past year, the "core" measures of inflation, which excludes these, leave at least some economists unmoved.

"There are few real people who think inflation is tame," says Joel Naroff, president of Naroff Economic Advisors. "Yet the markets want to believe it and the way we measure it tells investors that is the case."