The Labor Department reported that on a seasonally adjusted basis, its consumer price index held steady in July after rising 0.7 percent in the month of June, in line with analyst estimates. Excluding volatile food and energy prices, the so-called "core" rate of inflation rose 0.1 percent.
Since last July, when soaring gas prices drove the cost of gasoline above $4 a gallon, consumer prices fell 2.1 percent. That drop marks the biggest year-over-year dip since 1950, and comes amid worries by some economists that the Federal Reserve's decision to pump a record $1 trillion into the banking system would spur inflation.
"For all the inflation fear mongering, the fact remains that prices have, in the near term, declined further rather than turned upwards," Dan Greenhaus, chief economic strategist at Miller Tabak, said in a research note.
Overall, retail prices for food and beverages fell 0.2 percent in July, as did housing costs. Gasoline prices decreased by 0.8 percent, while transportation and health care costs both edged up by 0.2 percent. Clothing prices also rose, by 0.6 percent.
Friday's report follows a statement from the Federal Reserve on Wednesday saying it expected "that inflation will remain subdued for some time."
"I don't really see inflation as being much of a threat over the next several months because there's just too much slack in the economy," Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, told Bloomberg News.
Economists have also watched closely for signs of deflation, or a sharp drop in prices, which could also bode badly for a shrinking economy.
Stocks in the U.S. dropped on downbeat preliminary figures from Reuters and the University of Michigan showing consumer sentiment unexpectedly fell in August for a second straight month. The Dow Jones Industrial Average slid 151 points, or 1.6 percent, to 9,246.66 at 12:34 p.m., while the Nasdaq Composite Index lost 38 points, or 1.9 percent, to 1,971.
---- Compiled from wire reports and other media sources