The unexpected decline in US consumer prices and retail sales month over month suggested inflation pressures are moderating, which could have an impact on further interest rate increases by the Federal Reserve this year.
Unemployment dropped by 50,000 to 1.53 million in the quarter, a 42-year low unemployment rate of 4.6%.
Fed futures markets on Wednesday showed the chances of another increase before the end of the year, which had been seen as highly likely in September or December, had fallen below 50 percent.
Food prices rose 0.2% on the month with a year-on-year increase of 0.9%.
Most retail names are down roughly 1 percent on the weaker-than-expected retail sales.
The Fed kept forecast for economic growth this year of 2.2 percent, up slightly from its March forecast, with growth of 2.1 percent in 2018 and 1.9 percent in 2019. Recent data have suggested that inflation may even be slowing further.
Auto sales remained sluggish for the month, falling 0.2 percent in May, while electronics and appliance sales saw their largest monthly decrease in more than seven years, plunging 2.8 percent. Receipts at service stations dropped 2.4 percent, the largest decline since February 2016.
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. The Atlanta Fed is forecasting GDP rising at a 3.0 per cent annualised rate in the second quarter.
The dollar fell to a seven-month low against a basket of currencies on the data, before retracing some of the losses.
"Clearly officials will be mindful of incoming inflation trends in the coming months before greater confidence can be made with second half of the year policy normalization plans", said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
For now, Fed officials don't appear overly concerned with the recent downward path, attributing it at least in part to one-time drops in prices for things like wireless telephone services and prescription drugs. The index, which tracks the greenback against the currencies of major United States trade counterparts, was above the 97 level before the data release.
Economists had projected CPI to be flat, and retail sales to rise 0.1 percent.
Clothing costs dropped 0.8 percent in May while the cost of new cars and used cars both fell 0.2 percent. Those figures would rise in increments over a year until they reached $30 billion a month in Treasurys and $20 billion in mortgage bonds. Over the past 12 months, food costs are up just 0.9 per cent while energy prices have risen 5.4 per cent.
Despite the weak report, analysts noted that April's sales numbers were revised significantly upward, especially in the "control" group of goods, which excludes gasoline, cars and building materials. Excluding automobiles, retail sales also contracted by 0.3% on a monthly basis.