NEW YORK (CNN/Money) - U.S. consumer spending slumped in June amid slight income growth, the government reported Tuesday, with both readings coming in below estimates.

Personal spending fell 0.7 percent in June after climbing 1 percent in May, the Commerce Department said, coming in below estimates for a 0.1 percent decline, according to Briefing.com.

Adjusted for inflation, spending plunged 0.9 percent, led by a 5.8 percent drop in long-lasting durable goods, while spending on services rose less than 0.1 percent. The government added that a sharp decline in vehicles and parts sales accounted for most of the June slide in durables.

"The refinancing boom and effects from the tax rebates are waning, so spending on big-ticket items such as cars may be slowing down," said Anthony Crescenzi, bond strategist with Miller Tabak & Co. "But spending on services, which is where the majority of the job creation occurs, has held on, and we expect it to pick up. Friday's payroll report should be a good indication of that."

The government issues its July employment report at 8:30 a.m. ET Friday.

Following the report, stocks opened lower and bond prices dipped slightly, with the 10-year note yielding 4.45 percent.

Incomes rose 0.2 percent in June, a slowdown from May's 0.6 percent gain, and were below views for a 0.3 percent gain, according to Briefing.com.

Accounting for inflation, incomes held steady from their May reading. The department said disposable income rose 0.2 percent, but was unchanged when inflation was taken into account.

Wages also eased slightly compared to strong gains in May.

Private wages fell $2.7 billion after a $35 billion increase in May, manufacturing payrolls were unchanged in June after a $5.1 billion increase the previous month and service job payrolls dipped $3.2 billion after a $27.3 billion gain in May.

The report showed inflation moderated in June, with the price index for consumer purchases up 0.2 percent following a 0.4 percent increase the previous month. Excluding volatile food and energy costs, prices rose a scant 0.1 percent for the second month in a row.

However, Miller Tabak's Crescenzi noted that the Fed is most likely looking at spending reports as recent inflation readings have come in subdued after a brief runup in previous months.

"Yesterday's ISM shows manufacturing saw strong demand in July and businesses are confident," he added. "This is another indication that June may have been an anomaly and gives the Fed the ability to raise rates steadily."

Indeed, according to the Federal Funds futures, traders are looking for interest rates of about 2 percent by the end of the year. That indicates three quarter-percentage-point hikes over the Fed's next four meetings in 2004. The next meeting for the central bank is Aug. 10.