Economists expected the CPI to be unchanged, with core prices rising 0.2%.
United States inflation data for the month of May showed consumer prices unexpectedly falling on a monthly basis, marking the second drop in three months. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product and were previously reported to have increased 0.2 per cent in April. "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 U.S. economist at Capital Economics in Toronto.
The unemployment rate hit a 16-year low in May, underscoring steady improvement across the labor market, though wage gains have remained subdued.
Vehicle sales remained sluggish for the month, falling 0.2 percent in May, while electronics and appliance sales saw their largest monthly decrease in more than seven years, plunging 2.8 percent. The Fed also announced plans to start gradually paring its bond holdings later this year, which could cause long-term rates to rise.
Sales sank 2.8 per cent at electronics stores, 2.4 per cent at gasoline stations and 1 per cent at department stores, which have struggled with competition from online retailers.
While the USA central bank is expected to raise interest rates by 25 basis points at the end of a two-day meeting later on Wednesday, weak inflation, if sustained, could put further monetary tightening this year in jeopardy. The loonie was on pace for its best week since January 2016, up 2.5 percent since Friday. By then, the Fed's forecast would put its key policy rate at 3 percent.
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 CPI rose 2.2 per cent in the 12 months through April.
The dollar fell to a seven-month low against a basket of currencies on the data, before retracing some of the losses. In the 12 months through May, the CPI rose 1.9 percent, the smallest increase since last November, after advancing 2.2 percent in April. U.S. stock index futures pared gains.
According to the CSO data, manufacturing sector, which constitutes 77.63 per cent to the IIP, grew at 2.6 per cent in April compared to 5.5 per cent in same month past year. This rise was owing to 0.3 percent rise in rents and 0.2 percent rise in owner-occupied housing.
Shelter costs - which account for about a third of the overall price index - increased 0.2% on the month and rose 3.3% on the year.
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. Analysts were expecting a 0.1% rise, while April's figure showed a 0.4% growth. Sales at restaurants and bars slipped 0.1%.