USA consumer prices fell 0.1% for May compared with consensus forecasts of prices being unchanged on the month while the year-on-year inflation rate declined to 1.9% from 2.2% previously and compared with an expected rate of 2.0%.
The Labor Department said on Wednesday its Consumer Price Index dipped 0.1 percent last month after rising 0.2 percent in April. On a yearly basis, inflation rose by 1.9%, recording its smallest increase since November of past year.
Against the yen, the greenback fell by more than 1 percent following the data release to touch 108.95 yen, its lowest since April 21.
The Canadian dollar rose 0.45 percent, hitting its highest against the USA dollar since February 27.
The Fed said on Wednesday it expected annual inflation rates to "remain somewhat" below 2 percent in the near term but stabilize around the central bank's target over the medium term.
Economists had projected CPI to be flat, and retail sales to rise 0.1 percent. 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.More news: Apple's new app rules tighten grip on China's tipping
The Atlanta Fed is forecasting the economy growing at a 3.0 percent annualized rate in the second quarter, but this estimate could be trimmed following the weak core retail sales.
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.
Wall Street was expecting a mild 0.1% rise overall and a 0.2% increase outside the stalling auto sector.
Here's a key point to keep in mind: One of the main reasons the inflation and retail sales report were lower than expected is because oil has been dropping, and that has been affecting the inflation and sales outlook.
The cost of food, however, increased for the fifth straight month. Still, the fact that these price pressures are proving slow to show up adds considerable risk to additional Fed hikes later this year, added TD Economics.
The Fed's revised forecasts reduced its estimate for unemployment by year's end to 4.3 percent from a March projection of 4.5 percent.More news: US official makes brief appearance at G7 environment summit
The Fed has a 2 percent inflation target and tracks an inflation measure which is now at 1.5 percent.
Department store sales tumbled 1.0 percent, the largest drop since July 2016.
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 a year ago.
For the first time since January 2012, food prices saw deflation in May (-1.05 per cent) and the prospect of good monsoon rains is likely to keep food inflation in check.
Sales at nonstore retailers led by Amazon (AMZN) and building materials suppliers such as Home Depot (HD) have been the strongest categories, while sales at department stores such as Macy's (M) continue to bleed.More news: 'The Mummy' turns out to be Tom Cruise' biggest mistake