The government data released Wednesday came out just hours before the Federal Reserve is widely expected to increase interest rates when concludes its two-day monetary policy meeting, despite weak inflation and tepid wage growth.

The Labor Department said on Wednesday its Consumer Price Index dipped 0.1 percent last month after rising 0.2 percent in April.

The increase in the short-term rate by a quarter-point to a still-low range of 1 percent to 1.25 percent could lead to higher borrowing costs for consumers and businesses and slightly better returns for savers.

Retail inflation slumped to record low of 2.18 per cent in May driven by sharp drop in kitchen staples like vegetables and pulses, strengthening government's case for lowering of interest rate by RBI.

Economists had projected CPI to be flat, and retail sales to rise 0.1 percent.

US retail sales recorded their biggest drop in more than a year in May amid declining purchases of motor vehicles and discretionary spending, which could temper expectations for a sharp acceleration in economic growth in the second quarter.

Retail sales rose 3.8 percent in May on a year-on-year basis. In addition to a drop in energy costs last month, the price of clothing, airline fares and medical care also declined. The CPI rose 0.2 per cent in April.

The second drop in the CPI in three months could worry Federal Reserve officials, who have previously viewed the weakness in inflation as transitory.

Shelter costs - which account for about a third of the overall price index - increased 0.2% on the month and rose 3.3% on the year. "It won't stop the Fed from hiking interest rates later today, but it increases the downside risks to our forecast that there will be a further two rate hikes in the second half of this year", said Paul Ashworth, chief United States economist at Capital Economics in Toronto.

The headline CPI for the 12-months through May fell below the Fed's two percent target to 1.9 percent last month, continuing a steady decline since February.

Retail sales were still down 0.3 per cent even after excluding the more volatile food and cars categories, the first decline for the core measure since August.

Economists polled by Reuters had forecast the CPI unchanged last month and advancing 2.0 percent from a year ago. That has led some retailers, including Macy's M.N , Sears SHLD.O and Abercrombie & Fitch ANF.N to announce shop closures.

Gasoline stations saw sales fall 2.4 per cent, the biggest dip since February of a year ago. Analysts were expecting a 0.1% rise, while April's figure showed a 0.4% growth. Sales at electronics and appliance stores plunged 2.8 per cent, the largest drop since March 2010.

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 past year. Excluding automobiles, retail sales also contracted by 0.3% on a monthly basis.