A separate report showed strong manufacturing activity in the Midwest this month, which economists said underscored forecasts for solid growth despite the recent storms.
Consumer spending climbed 0.5 percent in September after a 0.5 percent drop in August, the Commerce Department said. But soaring fuel costs ate into the September gain, which when adjusted for inflation turned into a 0.4 percent drop.
At the same time, income shot up 1.7 percent, the biggest rise since December 2004, as insurance payouts increased at a $120 billion annual rate in the wake of recent hurricanes.
Separately, the National Association of Purchasing Management-Chicago said its index of Midwest manufacturing activity rose in October to 62.9 from 60.5 in September.
Analysts said that while the hurricanes made the spending and income data hard to read, the manufacturing report suggested the US economy was growing strongly.
"It reaffirms the view that the US economy remains on a solid growth track," said Alex Beuzelin, a senior market analyst with Ruesch International in Washington.
The stronger-than-expected manufacturing data pushed prices for US government bonds down, while the dollar, which had already hit a 25-month high against the yen on the jump in income and inflation concerns, extended gains.
The reports came a day before a meeting of Federal Reserve policy-makers and buttressed the view that the central bank still has a ways to go in pushing up interest rates to ensure lofty energy prices do not spark a broader inflation.
Fed officials are widely expected on Tuesday to nudge overnight borrowing costs up by a quarter-percentage point for a 12th straight time, taking the key rate to 4 percent.
The September income gain followed a downwardly revised 0.9 percent drop in August, when retail and personal business income plummeted due to uninsured property losses caused by Hurricane Katrina, which hit the Gulf Coast on August 29.
Stripping out hurricane-depressed rental and proprietors' income and the subsequent boost from insurance benefits, the Commerce Department said personal income would have risen 0.5 percent in September and 0.3 percent in August.
The department's inflation measure - closely watched by Fed policy-makers - shot up 0.9 percent in September, the biggest rise since February 1981.
But excluding food and energy, the so-called PCE price index advanced 0.2 percent. Over the past year, this core price index has risen 2 percent, a level considered to be at the upper end of the Fed's comfort zone.
The spending, income and inflation data released on Monday was incorporated in a report on third-quarter economic growth issued on Friday, lessening its impact on financial markets.
The saving rate - the percentage of after-tax income Americans sock away - remained in negative territory in September for a fourth straight month, showing Americans continued to borrow or tap assets to fuel spending.
The report on Midwest manufacturing showed a surge in new orders and a pickup in hiring. Economists said the report suggested factories were already stepping up production in the wake of a big drop in inventories in the third quarter.