June 17 (Bloomberg) -- The cost of living in the U.S. fell over the last 12 months by the most in six decades, easing concern that government efforts to revive the economy will lead to an immediate outbreak of inflation.

The consumer price index dropped 1.3 percent in the year ended in May, the most since 1950, the Labor Department said today in Washington. Prices increased just 0.1 percent last month, less than anticipated, after no change in April.

The lack of sustained gains in sales is one reason companies are finding it difficult to pass increases in fuel costs on to customers. Higher gasoline prices will probably restrain Americans’ discretionary spending at a time when the economy is showing signs of stabilizing.

“Inflation is not an issue,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. “There are huge amounts of slack in the economy and demand is quite soft, so it’s difficult to see how inflation can pick up for the balance of the year.”

Another report showed the U.S. deficit in its current account narrowed in the first quarter to the lowest level since 2001. The gap, the broadest measure of international flows because it includes trade, investment income and government transfers, fell to $101.5 billion from $154.9 billion in the last three months of 2008, the Commerce Department reported.

Rates Rise

Treasury securities fell as investors fretted about oversupply of notes ahead of next week’s auctions. The yield on the benchmark 10-year note rose to 3.68 percent at 4:30 p.m. in New York from 3.66 percent late yesterday.

Concern over the amount of money the Federal Reserve has pumped into financial markets and the size of government auctions to pay for stimulus efforts caused interest rates on Treasuries to shoot higher in recent weeks. Ten-year note yields reached as high as 3.95 percent at the close on June 10.

Central bankers meet to discuss policy next week. Officials are considering whether to use their statement to suppress any speculation they’re prepared to raise interest rates as soon as this year.

Economists forecast consumer prices would rise 0.3 percent, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from a 0.1 percent decrease to a gain of 0.6 percent.

Excluding food and fuel, costs also climbed 0.1 percent, matching the median forecast. Compared with a year earlier, the so-called core rate increased 1.8 percent, down from a 1.9 percent 12-month gain in April.

Fuel Costs

Energy costs increased 0.2 percent in May, as a 3.1 percent rise in the price of gasoline was partly offset by declines in fuel oil and natural gas.

These prices may continue to rise in coming months. The average price of a gallon of regular gasoline at the pump is up 65 percent this year, reaching an almost eight-month high of $2.68 yesterday, according to data from AAA.

Should retail gasoline prices peak at $2.75 a gallon, the increase since the start of the year will deduct $50 billion at an annual rate from household cash flows, according to a forecast by Richard Berner, co-head of global economics at Morgan Stanley in New York. The loss would offset almost all the benefit of the tax cuts from the Obama administration’s stimulus plan, he said in a June 8 report.

“There’s not pricing power in this otherwise very weak economy,” said Richard DeKaser, chief economist at Woodley Park Research in Washington. “Inflation is going to remain very weak and over the next year will continue to weaken given the tremendous amount of slack in the economy.”

Cheaper Food

Food prices, which account for about a seventh of the CPI, decreased 0.2 percent in April, reflecting lower costs for all major categories including fruits and vegetables, meats and dairy products.

The core index was constrained by falling prices for public transportation, apparel and tobacco. Rents, which make up almost 40 percent of the core CPI, were also subdued. A category designed to track rental prices rose 0.1 percent.

New vehicle prices climbed 0.5 percent. Car costs may decline in coming months as automobile makers slash prices or increase incentives to revive demand and lighten bloated inventories.

Chrysler LLC, seeking to restructure under bankruptcy, began offering five-year, no-interest loans on some models this month. The financing, announced June 3, runs through July 1 and is an alternative to rebates of as much as $6,000 for consumers who buy through certain credit unions and already own a Chrysler vehicle. The cash option was put in place last month.

Macy’s Inc. was among retailers cutting prices to clear stockpiles. Aeropostale Inc. earlier this month was offering 20 percent off women’s dresses. American Eagle Outfitters Inc. was giving 50 percent off the purchase of a second graphic t-shirt.

To contact the reporter on this story: Courtney Schlisserman in Washington cshlisserma@bloomberg.net

Last Updated: June 17, 2009 17:13 EDT