U.S. consumer prices were unchanged in July and actually declined around two percent from the same time a year ago.
Friday's Labor Department report shows inflation dropping at the sharpest rate in decades.
Some analysts say these readings show inflation is tame for the time being, which will allow the U.S. central bank to keep interest rates at historic lows.
The Federal Reserve lowers interest rates to bolster the economy, but raises them to fight inflation.
Inflation is being kept in check by the worst slump in consumer spending since 1980, which reduces demand for goods and services and gives companies less power to raise prices.
Consumer spending may not rebound soon, as a report Friday showed U.S. consumers growing more worried about the economy.
Data from the University of Michigan shows consumers lost confidence because of concerns about unemployment and wages. Economists watch consumer confidence for clues about the consumer spending that drives about two-thirds of the economy.
A separate government report shows production at U.S. factories, mines and utilities rose half a percent in July. It is only the second monthly boost for industrial production since the recession began in 2007, and reflects increased output by recovering auto companies.
Some information for this report was provided by AP and Reuters.