* Consumer spending unchanged in March
* Inflation-adjusted consumer spending rises 0.3 percent
* PCE price index falls 0.2 percent, up 1.8 percent y/y
* Core PCE index dips 0.1 percent, rises 1.6 percent y/y
By Lucia Mutikani
WASHINGTON, May 1 (Reuters) - U.S. consumer spending was unchanged in March for a second straight month and a key inflation measure recorded its first monthly drop since 2001, but economists still expect an interest rate increase in June as the labor market tightens.
The Commerce Department report on Monday come ahead of a two-day meeting by the Federal Reserve's policy-setting committee. The U.S. central bank is not expected to raise interest rates at the end of the meeting on Wednesday.
The weak consumer spending and subsiding inflation pressures did little to change expectations of a rate hike in June. Consumer spending accounts for more than two-thirds of U.S. economic activity.
"We don't expect that will prevent the Fed from hiking interest rates again at the June meeting, at least not as long as employment growth rebounds in April and May," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
The Fed lifted its overnight interest rate by a quarter of a percentage point in March and has forecast two more hikes this year. The consumer spending data was included in last Friday's first-quarter gross domestic product report, which showed consumer spending increasing at a 0.3 percent annual rate - the slowest pace since the fourth quarter of 2009.
The economy grew at a 0.7 percent rate in the first quarter, the worst performance in three years.
Prices for U.S. government bonds rose on the spending and inflation data, while the dollar fell to a session low against the euro.
The personal consumption expenditures (PCE) price index excluding food and energy slipped 0.1 percent, the first and largest drop since September 2001, after increasing 0.2 percent in February. In the 12 months through March, the so-called core PCE price index increased 1.6 percent, the smallest gain since last July, after advancing 1.8 percent in February.
The core PCE is the Fed's preferred inflation measure. The U.S. central bank has a 2 percent target.
"We view the drop in the core PCE price index in March as an aberration and we expect the core inflation rate to creep upwards over the coming months," said said John Ryding, chief economist RDQ Economics in New York.
The overall PCE price index fell 0.2 percent in March. That was the first decline since February 2016 and the biggest drop since January 2015. In the 12 months through March the PCE price index increased 1.8 percent after rising 2.1 percent in February.