Consumer spending unexpectedly rose in March as benign inflation supported household's spending power, a hopeful sign for an economy that lost significant momentum towards the end of the first quarter.

The Commerce Department said on Monday consumer spending advanced 0.2 percent last month after an unrevised 0.7 percent increase in February.

Economists polled by Reuters had expected spending, which accounts for about 70 percent of economic activity, would be flat last month.

After adjusting for inflation, spending increased 0.3 percent after advancing by the same margin in February. The spending details were included in Friday's first-quarter gross domestic product report.

The report offered hope that growth in the second quarter would probably not slow as sharply as currently feared. The economy grew at a 2.5 percent annual pace in the first three months of the year.

Output in the first quarter was boosted by a brisk 3.2 percent increase in consumer spending, despite the end in January of a 2 percent payroll tax cut.

Last month, income rose 0.2 percent after a 1.1 percent increase in February. Income at the disposal of households after inflation and taxes increased 0.3 percent after a 0.7 percent gain in the prior month.

With income growth matching spending, the saving rate - the percentage of disposable income households are socking away - was unchanged at 2.7 percent.

The report showed little inflation, with a price index for consumer spending dipping 0.1 percent, the first drop since November. A core reading that strips out food and energy costs was flat.

Over the past 12 months, inflation has risen just 1.0 percent, the smallest gain since October 2009 and a slowdown from the 1.3 percent logged in the period through February.

Core prices are up 1.1 percent, the smallest rise since March 2011 and well below the Federal Reserve's 2 percent target. Core PCE had increased 1.3 percent in February.

The lack of inflation pressure gives the central bank scope to maintain its very easy monetary policy stance.

Fed officials meet this week to assess the health of the economy. The Fed is widely expected to keep purchasing bonds at a pace of $85 billion a month.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)