Spending by US consumers slowed in July as the impact of expansionary tax rebates faded and a pick up in inflation eroded Americans' buying power.

The Commerce Department's figures put a dampener on renewed optimisim in the world's biggest economy after the authorities yesterday revised up second-quarter GDP growth.

Purchases rose just 0.2 per cent in July, a third of the pace of June, the Washington-based Commerce Department said.

The spending slowdown came in July came at the same time as inflation rose to its highest level in 17 years. Consumer prices were 5 per cent higher than a year ago in July and rose 1.1 per cent on a monthly basis.

Consumer spending, which accounts for more than two-thirds of the US economy, has fallen in 2008 as unemployment rose and home values dipped.

Americans are cutting back on big purchases such as cars and furniture, the report showed.

The spending report hit US stocks the day after the GDP revision sparked a rally. The GDP report showed the American economy grew at a far stronger 3.3 per cent than the 1.9 per cent originally reported.

The revised figures from the Commerce Department compared with a 0.9 per cent increase in the economy in the first quarter.

However, analysts cautioned that much of the GDP growth was driven by the weak dollar, which boosted exports by making America's goods and services cheaper for foreign buyers.

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