Consumer prices were flat in July for a second straight month and the year-over-year increase was the smallest since November 2010, giving the Federal Reserve room for further monetary easing to tackle stubbornly high unemployment.
Economists polled by Reuters had expected the Consumer Price Index to rise 0.2% last month. In the 12 months to July the CPI rose 1.4%, slowing from June's 1.7% rise, the Labor Department said on Wednesday.
Stripping out food and energy, inflation pressures were also tame. Core CPI rose 0.1 percent, the smallest increase since February, and breaking four consecutive months of 0.2 percent increases.
Economists had expected core CPI to increase 0.2% last month. In the 12 months to July, the index which is closely watched by the Fed, rose 2.1% - the smallest rise since October last year. That followed a 2.2% increase in June.
This measure has rebounded from a record low of 0.6 percent in October and the Fed aims for inflation of 2%.
Despite signs of a pick-up in job growth and domestic demand early in the third quarter, price pressures remain tame and the unemployment rate too high, leaving many economists to anticipate further policy easing by the end of the year.
"That says slower economy on inflation data," said Frank Lesh, an analyst at FuturePath Trading in Chicago.
Other data showed manufacturing activity in New York state contracted in August for the first time since October 2011.
Officials at the U.S. central bank meet on September 12-13. Fed Chairman Ben Bernanke's speech at the central bank's high-profile gathering in Jackson Hole, Wyoming, in late August could offer clues on the near-term course of monetary policy.
Bernanke used that forum in 2010 to communicate the Fed's intention to pursue a second round of quantitative easing.
Last month, overall inflation was held down by a 0.3% drop in energy prices, which offset a 0.1% gain in food prices.
A drought ravaging much of the country could lift food prices in the coming months, but the impact on inflation will be modest as food accounts for about 14% of the CPI.
Core consumer prices were last month restrained by a 0.5% drop in the cost of used motor vehicles and trucks. New motor vehicle prices slipped 0.1% after rising 0.2% in June.
There were modest increases in apparel prices, which advanced for a fifth straight month. The cost of medical care increased 0.3% after rising 0.7% in June.
Owners' equivalent rent advanced 0.2% in July after gaining 0.1% in June.