NEW YORK (CNN/Money) - Personal income and consumer spending rebounded in February from weak readings the previous month, the government said Thursday, as a closely watched inflation reading in the report showed slightly higher prices than expected.

The Commerce Department report showed that personal income rose 0.3 percent in February, compared with a revised 2.5 percent decline in January. Economists surveyed by Briefing.com had forecast a 0.4 percent rise.

Spending by individuals rose 0.5 percent after being up a revised 0.1 percent in January. Economists had forecast a 0.5 percent gain in personal spending.

The report also showed the prices paid by consumers rose 0.3 percent in the month, following a 0.2 percent increase in January, A Reuters poll of analysts had expected the PCE price index to show another 0.2 percent rise.

But prices excluding food and energy gained only 0.2 percent after a 0.3 percent increase in January. That inflation reading is one closely watched by Federal Reserve Chairman Alan Greenspan. And Wachovia Securities Mark Vitner said that the core number was in line with forecasts, which help reassure markets Thursday.

"Inflation is rising, but it's not rising at an alarming rate," he said. "I think the market breathed a sigh of relief that inflation was no worse than expected."

Markets have been particularly concerned with inflation readings recently as investors try to judge whether the Fed will stick with quarter-percentage point rate hikes or become more aggressive in order to combat inflation.

Treasury prices rose as yields, which move in the opposite direction, fell on Thursday's report.

Consumer spending is a key driver of the nation's economy, responsible for nearly three-quarters of economic activity. The rise in prices, particularly gasoline prices, was partly responsible for the gain in spending. In constant dollars, spending increased by 0.3 percent.