The Commerce Department said consumer spending, which accounts for more than two-thirds of US economic activity, increased 0.5 percent after gaining 0.2 percent in November. That's the biggest increase in spending in December since the last month of 2009, just as the USA began to emerge from the Great Recession.
Incomes also showed some improvement, rising by 0.3 percent in December, spurred by a rebound in growth in wages and salaries.
The core personal consumption expenditure deflator - which excludes food and energy and is the Federal Reserve's preferred measure of inflation - was up 1.7% year-on-year in December, in line with analysts' estimates and the previous month's rate of growth.
The December Core PCE Price Index rose 0.1 percent versus a flat reading in November. The core PCE price index increased 1.7 percent on a year-on-year basis after a similar gain in November.
The latest figures show consumer spending picked up again in December, after a fall slowdown. The US central bank, which has forecast three rate hikes this year, is not expected to raise rates at this week's meeting.
When adjusted for inflation, consumer spending increased 0.3% last month after rising 0.2% in November. Slower consumer-spending gains in the fourth quarter contributed to overall economic growth decelerating to a 1.9% pace from a strong 3.5% increase in the third quarter, according to a Commerce Department report on gross domestic product released last week. The Fed lifted its benchmark overnight interest rate in December by 25 basis points to a range of 0.50% to 0.75%. These contracts become sales after a month or two.
Despite steady gains in employment, unambiguous signs of mounting inflation have been slow to materialize in the world's largest economy, making U.S. central bankers wary of raising rates too fast amid a tepid economic recovery.
"This rise in inflation was anticipated and largely represents a fading of the effects of earlier declines in energy prices and the prices of nonenergy imports", Fed Chairwoman Janet Yellen said in a speech earlier this month. But it is still below the Fed's target of 2 percent annual increases in inflation. Spending on services, most likely utilities, increased 0.4 percent.
Personal income advanced 0.3% last month after nudging up 0.1% in November.
Outlays on long-lasting goods, such as cars and appliances, rose sharply in December, while spending on goods that are used more quickly, including gasoline and clothes, increased just slightly.
Savings fell to $768.4 billion last month, the lowest level since May 2015, from $791.2 billion in November.