Core CPI - which excludes food and energy.was up 0.1 percent, also below expectations.
The unexpected decline in US consumer prices and retail sales month over month suggested inflation pressures are moderating, which could have an impact on further interest rate increases by the Federal Reserve this year.
June 14 The dollar index on Wednesday fell to its lowest since November 9 against a basket of major currencies that measure its strength after the release of weaker-than-expected U.S. CPI and retail sales data.
And the most important pillar of the economy - the job market - remains solid if slowing, with employment at a 16-year-low of 4.3 percent - even below the level the Fed associates with full employment. Unemployment in May dipped to 4.3 per cent.
And gasoline stations saw sales drop 2.4 percent, the biggest decline since February of a year ago.
The fall in headline inflation was in large part attributed to the significant decline in gasoline prices, which recorded their largest contraction since February a year ago.
Excluding volatile food and energy costs, so-called core CPI rose by 0.1% from April, and 1.7% from May 2016, both less than expected.
However, Fed officials have said they believe the recent slowdown in price gains reflected transitory factors and they expect inflation will resume moving toward 2 per cent as low unemployment helps to boost wages. The economy grew at a 1.2 per cent annualised rate in the first quarter, held back by a near stall in consumer spending and a slower pace of inventory investment. By then, the Fed's forecast would put its key policy rate at 3 percent.
In a separate report, the Labor Department said its Consumer Price Index dipped 0.1 per cent, weighed down by declining prices for gasoline, apparel, airline fares, communication and medical care services, among others. The CPI rose 2.2 per cent in the 12 months through April.
In May, energy prices fell sharply to reflect lower oil prices. On a yearly basis, inflation rose by 1.9%, recording its smallest increase since November of past year. Prices for U.S. Treasuries rallied, while stocks on Wall Street were little changed. This rise was owing to 0.3 percent rise in rents and 0.2 percent rise in owner-occupied housing.
Turning to retail sales, those fell by 0.3% month-on-month in May, marking their biggest drop since January previous year. Food prices rose for a fifth straight month.
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.
Analysts had projected CPI to be flat, and retail sales to rise 0.1 per cent.
Restaurants and bars also saw a 0.1 percent decline in May.
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.