But core inflation, which excludes volatile food and energy costs, was slightly higher - with no indication of deflation.
The Consumer Price Index, the Labor Department's key measure of inflation, declined 0.1% in March, after climbing 0.4% the previous month. Economists surveyed by Briefing.com had forecast a 0.1% rise in the latest reading.
The overall index is down 0.4% since March 2008, which is the first 12-month decline since August 1955, the government said.
However, that annual decline is largely a reflection of the steep drop in gasoline prices that occurred over the last year, according to Stuart Hoffman, chief economist at PNC Financial Services.
Gas prices averaged about $3.24 a gallon in March 2008, according to figures from the American Automobile Association. That compares with an average price of $1.96 per gallon in March 2009.
"That's not deflation," Hoffman said. "That's the benefit of lower energy prices continuing to feed through to the economy."
Deflation, a widespread drop in prices, is a sign of economic weakness. Lowering prices is one way businesses can cope with falling demand. But if companies can't earn a profit selling their products at lower prices, they could be forced to cut production or lay off workers, which speeds up the pace of economic deterioration.
Energy prices fell 3% last month, after increasing 3.3% in the prior month. Food prices declined 0.1% in March.
But prices excluding food and energy rose 0.2% in March after a 0.2% rise the month before. Economists were expecting a 0.1% gain. Core CPI has risen 1.8% over the past year.
The increase in core CPI was due mostly to an 11% rise in prices for tobacco and smoking products. Many retailers increased tobacco prices in March ahead of a federal tax hike that went into effect April 1.
The government said Tuesday that its Producer Price Index, a measure of prices paid at the wholesale level, fell more than expected last month. PPI declined 1.2% in March after a 0.1% increase the month before.
