Wednesday's report from the Labor Department showed that consumer prices rose 2.5 per cent in August from a year earlier, down from 2.9 per cent in July.
It was the fifth straight annual drop and the smallest such increase since February 2021.
From July to August, prices rose just 0.2 per cent.
Excluding volatile food and energy costs, so-called core prices rose 3.2 per cent in August from a year ago, the same as in July.
On a month-to-month basis, core prices rose 0.3 per cent last month, a slight pick-up from July's 0.2 per cent increase.
Economists closely watch core prices, which typically provide a better read of future inflation trends.
For months, cooling inflation has provided gradual relief to US consumers, who were stung by the price surges that erupted three years ago, particularly for food, petrol, rent and other necessities.
Inflation peaked in mid-2022 at 9.1 per cent, the highest rate in four decades.
A key reason for last month's drop in overall inflation was the third decline in petrol prices in the past four months: average petrol prices fell 0.6 per cent from July to August and are down 10.6 per cent from a year ago.
Used cars fell 1.0 per cent last month.
Measured from a year earlier, used car prices have tumbled 10.4 per cent.
Grocery prices were unchanged from July to August, extending a cooling in food costs even though they remain much higher than they were three years ago.
Over the past year, grocery prices have ticked up just 0.9 per cent, similar to the pace of pre-pandemic food inflation.
Federal Reserve officials have signalled that they are increasingly confident that inflation is falling back to their 2.0 per cent target and are now shifting their focus to supporting the job market, which is steadily cooling.
As a result, the policymakers are poised to begin cutting their benchmark interest rate from its 23-year high in hopes of bolstering growth and hiring.
A modest quarter-point cut is widely expected next week.
Over time, a series of rate cuts should reduce the cost of borrowing across the economy, including for mortgages, car loans and credit cards.
In a high-profile speech last month, Fed chair Jerome Powell noted that inflation was coming under control and suggested that the job market was unlikely to be a source of inflationary pressure.
Consumers have propelled the US economy for the past three years.
But they are increasingly turning to debt to maintain their spending and credit card, and car delinquencies are rising, raising concerns that they may have to rein in their spending soon.
Reduced consumer spending could lead more employers to freeze their hiring or even cut jobs.
