The Labour Department said on Wednesday higher gasoline prices contributed to the smaller-than-expected 0.1 per cent rise in its Consumer Price Index from April when the CPI was unchanged from the previous month. Financial markets had expected a 0.3 per cent increase in May.

Compared to the same period last year, the CPI fell 1.3 per cent, the largest decline since April 1950. The pace of the price decline also accelerated - the CPI dropped 0.7 per cent year-on-year in April.

The data soothed worries that massive spending by the US government and the Federal Reserve to pull the economy out of an 18-month-long recession - the longest since the Great Depression - may end up fueling inflation.

'There is no sign that there has been widespread inflation because of the Fed's quantitative easing regime. In fact, long-term inflation expectations haven't budged and the Fed is still ahead of curve on inflation,' said John Canally, an economist and investment strategist at LPL Financial in Boston.

The Labour Department said core prices, excluding food and energy, also rose only 0.1 per cent in May, slower than April's 0.3 per cent monthly gain, as prices for tobacco and smoking products fell after surging the last two months on the back of a federal excise tax increase.

It was the smallest monthly rise in the core CPI since December. The gain reflected a fifth straight monthly increase in new vehicle prices. Shelter and medical costs also rose.

Some analysts said core inflation could still be considered uncomfortably high, given that the economy has been in recession for a year-and-a-half.

'We could have an inflation problem going forward, but it's going to have to wait until we get a resuscitation of the banking system,' said Howard Simons, a strategist at Bianco Research in Chicago. 'Once that happens, we could get an inflation shock.' -- REUTERS