May consumer prices post biggest drop in 1-1/2 years

The Labor Department said its seasonally adjusted Consumer Price Index fell 0.2 percent last month, the largest decline since December 2008, after dipping 0.1 percent in April.

Analysts polled by Reuters had forecast consumer prices slipping 0.2 percent in May. In the 12 months to May, the CPI rose 2 percent, slowing from the 2.2 percent rise the prior month, also in line with market expectations.

The data followed a report on Wednesday showing prices received by farms, factories and refineries fell last month. Inflation remains a distant threat as the economy slowly recovers from the longest and deepest recession since the 1930s.

The Federal Reserve is expected to extend its ultra low interest rate policy next week and is not seen lifting overnight interest rates from near zero until next year.

In May, energy prices fell 2.9 percent, the largest decline in more than a year. With energy costs falling, gasoline prices tumbled 5.2 percent - the biggest drop since December 2008. Food costs were flat for the first time since October.

Excluding the volatile energy and food prices, the closely watched core measure of consumer inflation edged up 0.1 percent after being flat in April.

Analysts had expected core prices to rise 0.1 percent. The monthly core inflation rate was bumped up by increases in costs at hotels and motels, and for apparel, tobacco, medical care and used vehicles.

In the 12 months to May, the core inflation rate rose 0.9 percent after increasing by the same margin in April. The rise was also in line with market expectations. (Reporting by Lucia Mutikani; Editing by Neil Stempleman)