US consumer spending fell in real terms in July, signalling that the economy will weaken with the end of government stimulus payments, while a key inflation measure rose. In New York, stocks dropped in response to the news.

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

The Dow has fallen 152 points or 1.3%. The oil price rose $1.54 to $117.13 on fears that Tropical Storm Gustav will damage oil facilities in the Gulf of Mexico.

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

Consumer spending accounts for about 70% of US Gross Domestic Product (GDP).

Rising prices helped boost spending last month but when adjusted for inflation, spending in July fell 0.4%. Friday's data showed that 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 gained 4.5% in July. The year-over-year climb in June was 4.0%.

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 advanced 2.4% in July, after increasing 2.3% in June.

The economic stimulus payments boosted the level of personal current transfer receipts by a mere $4.2 billion, at an annual rate, in July compared with $149.9 billion in June and $179.6 billion in May.

The US Commerce Department reported Thursday that GDP grew at an annual 3.3% rate in the second quarter. However, economists cautioned that growth may slow further in the second half of 2008, partly due to the end of the stimulus payments, which were mainly issues in the form of tax rebates.