The Labor Department said Friday that its Consumer Price Index has fallen 2.1% over the past 12 months. It was the sharpest over-the-year drop since January 1950, when CPI fell at the same rate.
Economists surveyed by Reuters had forecast a 2% decline.
The decline was led by a sharp drop in energy prices, which are down 28.1% from July 2008, when both gasoline and oil prices were at record highs.
But if you factor out volatile energy and food prices -- which is known as the Core CPI -- consumer prices rose 1.5% on an annual basis.
On a monthly basis, Core CPI gained 0.1% in July while the basic CPI was unchanged. Both measures matched economists' expectations.
"The drop in CPI is mainly due to lower gasoline prices and lower grocery store prices," said Mark Vitner, an economist at Wells Fargo Economics Group.
Gas prices fell 0.4% in July after surging 17.2% the month before. The index of food prices was down 0.3% in July, and has fallen 1.8% over the last 12 months.
"Lower food prices are good news for consumers and should help free up some discretionary dollars for other purchases," Vitner said.
Friday's report indicates that inflation is not a threat to the economy and that the Federal Reserve will not have to raise interest rates any time soon, Vitner said.
"The fact that inflation is well behaved means the Fed has more latitude to hold rates at current levels for as long as they need to," he said.
The U.S. central bank said Wednesday that it expects "inflation will remain subdued for some time" and said that rates will remain near zero percent "for an extended period."
Inflation (CPI)School fees, health costs cancel fall in other prices
