WASHINGTON (Reuters) -U.S. retail sales barely rose in May and data for the prior month was revised significantly lower, suggesting that economic activity remained lackluster in the second quarter.

Inflation and higher interest rates are forcing households to prioritize essentials and cut back on discretionary spending. Last month's less-than-expected increase in retail sales bolstered economists' expectations that the Federal Reserve could still start cutting interest rates in September.

U.S. central bank officials last week saw the anticipated rate cut delayed to perhaps as late as December.

"Maybe households aren't quite as impervious to higher interest rates as we were beginning to believe," said Paul Ashworth, chief North America economist at Capital Economics. "Admittedly, we don't expect a full-blown slump in consumption but, at the margin, even a modest slowdown in consumption growth and consequently GDP growth too could be enough to tip a finely balanced Fed in favor of a rate cut in September."

Retail sales rose 0.1% last month after a downwardly revised 0.2% drop in April, the Commerce Department's Census Bureau said on Tuesday. Retail sales were previously reported to have been unchanged in April.

Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, gaining 0.3% in May. Retail sales have in recent months been distorted by an early Easter.

Nonetheless, the trend in sales growth has been slowing also as banks are tightening access to credit against the backdrop of lower income borrowers increasingly struggling to keep up with their loan payments.

Though the labor market remains on a solid footing, it is becoming a bit difficult for people who lose their jobs to quickly find new work and wage increases are moderating.

Savings have also been whittled down. Still, the pace of spending is likely sufficient to sustain the economic expansion.

The Fed last week kept its benchmark overnight interest rate in the current 5.25%-5.50% range, where it has been since last July. Policymakers projected only a single quarter-percentage-point reduction for this year. They, however, maintained their gross domestic product growth estimates.

The retail sales picture was mixed last month, with some areas of strength. Sales at gasoline stations dropped 2.2%, reflecting lower prices at the pump. Building material and garden equipment store sales sagged 0.8%. Sales at food services and drinking places, the only services component in the report, slipped 0.4% after advancing 0.4% in April. Economists view dining out as a key indicator of household finances.

Furniture store sales fell 1.1%. But receipts at motor vehicles and parts dealers rose 0.8%. Online store sales increased 0.8%, recouping only a fraction of the 1.8% decline in April. Sales at sporting goods, hobby, musical instrument and book stores increased 2.8% last month.

Receipts at electronics and appliance outlets gained 0.4%, while those at clothing retailers increased 0.9%.

Retail sales excluding automobiles, gasoline, building materials and food services rose 0.4% last month after a downwardly revised 0.5% drop in April. These so-called core retail sales were previously reported to have declined 0.3% in April.

Core retail sales correspond most closely with the consumer spending component of GDP. The downward revision to April's core retail sales pointed to moderate consumer spending in the second quarter and suggested that GDP growth estimates for the quarter could be trimmed.

Consumer spending increased at a 2.0% annualized rate in the first quarter, helping to restrain the economy to a 1.3% growth pace. Growth estimates for the second quarter are currently as high as a 3.1% rate.