Consumer prices fell at a record pace in May, adding to signs that a return to deflation may hamper a rebound from the nation's worst postwar recession.

Consumer prices excluding fresh food fell 1.1 percent from a year earlier after edging down 0.1 percent in the preceding two months, the statistics bureau said Friday in Tokyo. It was the sharpest drop since the survey began in 1971.

Bank of Japan Gov. Masaaki Shirakawa said last week that price declines will accelerate through the middle of the fiscal year as demand slackens and crude oil continues to trade lower than last year's record. Retailers including Aeon Co. are cutting prices to attract customers as falling wages and the worsening job outlook damp spending.

"Profits fall, then wages come down, then consumers stop shopping," said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. "And because people aren't shopping, companies lower prices. That's the process that we're starting to see. It isn't easy to break out of."

Worldwide inflation is easing as energy costs retreat and the worst global recession since the Great Depression forces companies to discount. Consumer prices failed to rise in the euro zone for the first time in at least a decade in May, and in the U.S. they fell 1.3 percent, the most since 1950.

"With demand deteriorating, companies are finding it more difficult to sell goods and services and are turning to discounting," said Azusa Kato, an economist at BNP Paribas in Tokyo.

Some 47 percent of 775 Japanese retailers surveyed by the Nikkei daily plan to lower prices in the year ending next March to spur sales, up from 9 percent a year earlier. Aeon, Japan's second-largest retailer, this week started a discount campaign for confectionery, drinks and mayonnaise.

Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to cut wages, which have already slid for 11 months. Japan only escaped from a decade of deflation in 2005.

Finance Minister Kaoru Yosano said an "extreme" slump in demand and production are causing the drop. "We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral," he said.

The Organization for Economic Cooperation and Development this week urged the BOJ to keep pumping cash into the economy "until underlying inflation is firmly positive." Since it cut the key interest rate to 0.1 percent in December, the central bank has been buying corporate debt and increased government bond purchases from lenders to revive growth.

BOJ Policy Board member Hidetoshi Kamezaki said this month that receding expectations of price increases "could lead to a deflationary spiral, which is very dangerous." Some 22 percent of consumers anticipate prices will be lower a year from now, the most since the government began asking the question in 2004.

"The Bank of Japan is clearly worried about the risk of deflation, not inflation, and an exit from its low-rate policy is still far away," said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Even when excluding food and energy, consumer prices fell 0.5 percent in May, the fastest pace in 22 months, the statistics bureau said.