Core inflation, which excludes volatile energy and food items, rose by 1.7% year-on-year, posting its smallest increase since May 2015.
It was the second monthly decline in the past three months and underscores how inflation has been a no-show in the slow-growing USA economy.
Retail sales unexpectedly fell 0.3% in May, the Commerce Department reported on Wednesday, the worst drop since January 2016. "It won't stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year", said Paul Ashworth, chief USA economist at Capital Economics in Toronto.
Sunil Kumar Sinha, Principal Economist, India Ratings & Research, said though inflation is going to remain low and well within the comfort zone of RBI, probability of large policy rate cut is low.
Economists polled by Reuters had forecast the CPI unchanged last month and advancing 2.0 percent from a year ago. Power generation rose by 5.4 per cent in April, down from 14.4 per cent expansion in April a year ago.
For now, Fed officials don't appear overly concerned with the recent downward path, attributing it at least in part to one-time drops in prices for things like wireless telephone services and prescription drugs.
Markets widely expect the Fed to raise its benchmark rate by 25 bps and investors will mostly be looking for guidance on the future path of interest rate increases.
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Growth is expected to pick up this quarter after being held back by a near stall in consumer spending and a slower pace of inventory investment at the start of the year. The Atlanta Fed is forecasting GDP rising at a 3.2 percent annualized rate in the second quarter.
Falling prices were widespread, with declines recorded for air fares, which were down a sharp 2.9 percent, as well as medical services, clothing and new and used cars.
The US dollar fell against a basket of currencies on the data, while prices for US Treasuries rose. The index, which tracks the greenback against the currencies of major U.S. trade counterparts, was above the 97 level before the data release. Owners' equivalent rent of primary residence advanced 0.2 per cent after a similar increase in April. Food prices rose for a fifth straight month.
The cost of goods and services for American consumers fell in May for the second time in three months as inflation continued to recede from a recent high-water mark.
Pay growth dropped to a weaker than expected 1.7% in the quarter, while inflation rose to 2.9% last month, resulting in a pay cut of £147 for the average United Kingdom worker.
Last month, rental costs increased 0.3 percent, matching April's gain.
Despite the weak report, analysts noted that April's sales numbers were revised significantly upward, especially in the "control" group of goods, which excludes gasoline, cars and building materials.