Consumer spending in the U.S. rose more than forecast in August as incomes climbed, bolstering the Federal Reserve’s forecast that the world’s largest economy will keep expanding at a “modest” pace.

Purchases rose 0.4 percent for a second month, Commerce Department figures showed today in Washington. The gain exceeded the 0.3 percent increase projected by the median forecast of economists surveyed by Bloomberg News. Incomes were up 0.5 percent, the biggest advance this year, propelled by the resumption of extended and emergency unemployment benefits.

The pickup in spending, the biggest part of the economy, bodes well for retailers heading into the holiday-shopping season. Nonetheless, a jobless rate that is projected to average at least 9 percent through next year may prevent demand from growing much more, indicating policy makers will remain alert to the possibility the recovery will flounder.

“Consumer spending will be pretty decent in the third quarter and will strengthen gradually,” John Herrmann, senior fixed-income strategist at State Street Global Markets LLC in Boston, said before the report. Even so, “we’re not yet on a self-sustained path of expansion. The Fed needs to provide enough of a tailwind to the economy.”

The median estimate was based on a survey of 79 economists. Projections ranged from increases of 0.2 percent to 0.5 percent.

Economists forecast incomes would also rise 0.3 percent, following a 0.2 percent gain, according to the Bloomberg survey.

Wages Cool

Wages and salaries increased 0.3 percent after a 0.4 percent increase the prior month, showing how the weak labor market is holding back paychecks. Transfer payments, which include government unemployment insurance outlays, jumped 1.6 percent. Congress passed legislation in late July extending emergency benefits.

Disposable incomes, or the money left over after taxes, rose 0.2 percent after adjusting for inflation. They dropped 0.2 percent in July.

The savings rate increased to 5.8 percent from 5.7 percent the prior month.

Today’s report also showed inflation has stabilized under the Fed’s long-term projection. The gauge tied to spending patterns increased 1.5 percent from August 2009, the same as in the 12 months ended in July.

The Fed’s preferred price measure, which excludes food and fuel, rose 0.1 percent from the prior month and was up 1.4 percent from a year earlier, matching the 12-month increase in June and July. The central bank’s long-term projection calls for an increase in the 1.7 percent to 2 percent range.

Fed Action

Fed policy makers on Sept. 21 moved closer to a second wave of unconventional monetary easing and said for the first time that too-low inflation, in addition to sluggish growth, would warrant taking action.

“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability,” according to the Federal Open Market Committee statement. The central bank is “prepared to provide additional accommodation if needed” to support the recovery and return prices to more desirable levels.

Today’s report showed that adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending rose 0.2 percent in August for a second month.

Dearborn, Michigan-based Ford Co. is among manufacturers seeing gains in sales while holding below pre-recession levels.

“The auto business is pretty steady and coming back up a little bit,” Ford Chief Executive Officer Alan Mulally told reporters in Ann Arbor, Michigan, on Sept. 17. The economy “is coming back slower than past recessions.”

Retailer Concerns

Some retailers such as Plano, Texas-based J.C. Penney Co. remain cautious. The third-biggest U.S. department-store chain has planned on getting little help this year from consumer sentiment and demand, said Chief Executive Officer Myron Ullman.

The lack of jobs is “the biggest single factor,” together with reduced home equity and credit constraints, Ullman said at an investor conference on Sept. 28. “It’s not a surprise that the consumer is still struggling.”

The economy is a top issue for voters in the November congressional elections and polls show the public is increasingly skeptical of President Barack Obama’s performance.