WASHINGTON (AP) — A measure of U.S. consumer prices fell in May by the most since December 2008 as gas costs dropped sharply. Outside food and energy, prices rose modestly.

The Labor Department said Thursday that the consumer price index dropped 0.3 percent. Gas prices plunged 6.8 percent, also the most since December 2008. Food costs were unchanged.

So-called "core" prices, which exclude the volatile food and energy categories, rose 0.2 percent for the third straight month.

Over the past 12 months ending in May, consumer prices rose 1.7 percent, much less than the pace for the 12 months that ended in April. Core prices have risen 2.3 percent in the past year, the same as for the 12 months ending in March and April. That's close to the Federal Reserve's 2 percent target for inflation.

Mild price increases leave consumers with more money to spend, which boosts economic growth. Lower inflation also gives the Fed more leeway to keep interest rates low.

Steady increases in rents for homes and apartments are pushing up core prices, though at a modest pace. Rents are increasing as more people forgo homeownership and rent instead.

Gas prices have tumbled 40 cents after peaking April 6. Prices at the pump averaged $3.54 on Wednesday, according to AAA. That's down 19 cents from a month earlier.

The decline in gas and energy costs caused a measure of U.S. wholesale prices to drop by the most in nearly three years in May. Outside that drop, wholesale prices barely rose. Modest wholesale inflation reduces pressure on manufacturers and retailers to raise prices. That helps keep consumer prices stable.

Still, American workers are seeing little growth in pay. Workers' average hourly earnings have risen just 1.7 percent in the past 12 months, less than the pace of inflation over that same period.

Without more jobs or higher pay, consumers could be forced to cut back on spending later this year. Consumer spending is critical because it accounts for 70 percent of economic activity

A small amount of inflation can be good for the economy. It encourages businesses and consumers to spend and invest money sooner rather than later, before inflation erodes its value.

The economy is growing but at a sluggish pace. That is keeping a lid on price increases. Slow growth makes it harder for consumers and businesses to pay higher costs. The economy expanded at just a 1.9 percent annual rate in the January-March quarter.

Lower prices also could make Fed Chairman Ben Bernanke more willing to take action to boost growth. If inflation was threatening to accelerate, Fed policymakers could feel compelled to raise interest rates or take other steps to fight rising prices. But with inflation tame, the Fed can focus on stimulating growth.