Consumer prices have fallen more in the past year than in any 12-month period in nearly six decades - a huge break for shoppers but also a reminder that prices are being restrained by weak spending that's likely to slow an economic recovery.
The recession and lower energy costs kept a lid on prices for July, causing consumer inflation to fall to zero. Most economists think prices are now in a sweet spot: ultra-low inflation without a serious risk of deflation - a destabilizing spiral of falling prices and wages.
"Right now, there is no inflation out there," said David Wyss, chief economist at Standard & Poor's in New York. "The big issue is still a lack of economic growth."
Wall Street remained nervous Friday that recession-battered consumers could short-circuit any economic rebound after the Reuters/University of Michigan index of consumer sentiment posted a significant drop for the first part of August. It was a much weaker showing than expected.
The Dow Jones industrial average lost about 76 points, and broader stock indexes fell, too.
In Friday's report on consumer inflation, the Labor Department said prices were flat in July and have fallen 2.1 percent over the past 12 months - the steepest drop since a similar decline for the period ending in January 1950.
Core inflation, which excludes volatile energy and food prices, showed a small 0.1 percent rise in July and over the past 12 months has risen 1.5 percent - right in the Federal Reserve's comfort zone.
The 12-month decline reflects a 28.1 percent plunge in energy costs, which peaked at this time a year ago, when oil hit a record $147 per barrel and gas crested above $4 per gallon.
Since then, energy prices have tumbled. Other price pressures have disappeared, too, as the country has struggled to cope with waves of layoffs and the worst recession since World War II.
Gasoline prices, on a seasonally adjusted basis, fell 0.8 percent in July. The average price at the pump is currently $2.65 per gallon, up from $2.50 a month ago but well below the record high of $4.11 per gallon hit in July 2008.
Airfares rose 2.1 percent in July, while clothing costs jumped 0.6 percent - two rare examples of big price gains in the month.
The low prices could pinch America's retirees. Because inflation has hit zero, economists expect the country's 50 million Social Security recipients will get no annual cost-of-living increase in their benefit checks next January.
That would be a marked change from this year, when benefits rose 5.8 percent, the biggest jump in more than a quarter-century.
The cost-of-living gain is figured by comparing the Consumer Price Index for the July-September period of one year to the same period in the next year. Last year's cost-of-living adjustment reflected a big jump in energy costs.
"This year will be payback time," said Mark Zandi, chief economist at Moody's Economy.com.
The most recent increase, which amounted to an extra $63 a month for the typical retiree, helped bolster spending at the beginning of 2009, when the recession was most severe.
Some analysts said Congress might include a boost to Social Security in another stimulus package. But others said they doubted that would happen, given the huge budget deficits from the previous stimulus spending and efforts to bolster the financial system.
The Labor Department said prices were flat in July, after a 0.7 percent jump in June. Both months were heavily influenced by a swing in the cost of gasoline and other energy products. Energy prices sank 0.4 percent in July after a 7.4 percent spike in June.
Food costs fell 0.3 percent, the sixth straight month they have either dropped or been unchanged. Analysts said excess supplies have depressed prices for meat and a host of dairy products.
Big supermarket operators such as Supervalu Inc. and Safeway Inc. - which operates 1,739 stores in the West, Midwest, Mid-Atlantic and western Canada - have pressured packaged-food makers to cut prices. These retail chains have slashed their own prices, too, to lure cash-strapped consumers.
"If the item is not on sale in our stores, it is far more likely to remain on the shelf," Supervalu CEO Craig Herkert said last month on a conference call with investors. The company has about 2,400 retail grocery locations nationwide, operating Albertsons, Jewel-Osco and Save-A-Lot stores.
Wal-Mart Stores Inc. this week reported its first-ever drop in same-store sales for its overall U.S. business for the quarter. The world's largest retailer said a big factor was price deflation, primarily in grocery products like dairy.
The U.S. has not experienced a bout of deflation since the Great Depression of the 1930s. And many economists say the Fed has responded aggressively enough with interest-rate cuts to prevent a dangerous bout of falling prices.
Many economists say the recession will end sometime in the current July-September quarter. But they expect the initial recovery to be so weak that the jobless rate will keep rising, probably peaking above 10 percent next summer.
In a hopeful sign that the recession could be bottoming out, the Fed reported Friday that industrial production rose 0.5 percent in July. It was the first increase in nine months.
The gain reflected moves by General Motors and Chrysler to reopen many plants that had been closed in May and June while they were restructuring and emerging from bankruptcy protection.
U.S. industry operated at 68.5 percent of capacity in July, up from a record-low operating rate of 68.1 percent in June.
Right now, factories have plenty of excess capacity, job layoffs are tapering off but still continuing, and retail sales remain bleak. In part, that's why economists say more price cutting is likely in coming months.