Personal income rose 0.3 percent in July, but spending climbed an even faster 0.8 percent, the Commerce Department said Monday.
The rise in spending matched the increase in February as the largest since summer 2009.
Adjusted for inflation, personal spending rose 0.5 percent last month, compared with a less than 0.1 percent decline in June.
"Purchases of motor vehicles and parts accounted for most of the increase in July and for most of the decrease in June," the Commerce Department said in its release.
Since spending rose more than income, the individual savings in July rate dropped to 5.0 percent from 5.5 percent of disposable income.
Adjusted for inflation, disposal income actually fell 0.1 percent to mark the first drop in 10 months. Disposable income, or take-home pay, fell mainly because of higher gas and food costs.
"Consumers had to save less in order to buy automobiles, turn on their air conditioners, and keep up with higher grocery and gasoline bills," said Chris Christopher, senior economist at IHS Global Insight.
The level of prices rose 0.4 percent based on the latest reading from the personal consumption expenditure price index.
The core PCE, which excludes volatile food and energy costs, rose a lesser 0.2 percent.
The core index is closely watched by central bankers and economists to gauge inflationary trends.
Economists surveyed by MarketWatch had forecast a 0.4 percent increase in personal income and a 0.6 percent rise in consumer spending. The core PCE index was expected to rise 0.2 percent.
Consumer spending is by far the bigger source of U.S. growth, but people have been reluctant to spend because of persistent weakness in the economy.
The jobless rate remains high at 9.1 percent and many companies are hesitant to hire, prompting consumers to save more and whittle down their debts.
As a result, the level of savings in July was still twice as high compared to the average in the last year before the 2007 recession.
The result is a classic chicken-and-egg scenario. Consumers won't sharply increase spending until the economy improves and more jobs become available, but companies won't hire lots of new workers until the economy improves and consumers spend more.