For July, wholesale energy prices fell 2.4 percent after having surged 6.6 percent in June. Gasoline dropped 10.2 percent and home heating oil plunged 11.9 percent.
Food prices at the wholesale level fell 1.5 percent last month, reversing a 1.1 percent rise in June. A big drop in vegetable prices led the overall decline, but beef and egg prices also fell.
The 6.8 percent decline in wholesale prices over the past year was the biggest since the government began keeping such records in 1947. It surpassed the 5.2 percent drop in the period ending in August 1949.
The 0.1 percent drop in core inflation left those prices rising 2.6 percent over the past 12 months. In July, prices for passenger cars fell 1.7 percent, the biggest decline in nearly three years.
The 1.8 percent gain in wholesale prices in June was the biggest one-month increase since November 2007. But economists said it represented a temporary burst and was not the beginning of a dangerous bout of spiraling prices.
Economists believe energy prices, which had propelled much of the gain, will level out and that the weak economy will keep the lid on overall inflation. Crude oil prices topped $72 a barrel in June but were trading below $67 per barrel Tuesday.
The Federal Reserve believes inflation will remain subdued for some time as the country struggles to emerge from the worst recession since World War II.
The Fed last week they planned to keep a key bank lending rate at a record low near zero for an "extended period," despite seeing signs that the economic downturn was "leveling out."
Home construction falls by 1 percent
Construction of new homes and apartments dipped slightly last month, missing expectations, in a sign that the building industry's recovery from the housing bust is likely to be bumpy and gradual.
The Commerce Department said Tuesday that new construction fell 1 percent in July to a seasonally adjusted annual rate of 581,000 units, from an upwardly revised rate of 587,000 in June. Economists polled by Thomson Reuters expected a pace of 600,000 units.
The decline was led by a 13 percent drop in apartment building. Construction of single-family homes rose 1 percent to the highest level since October 2008 and the fifth-straight monthly increase.