The Labor Department reported that its closely watched Consumer Price Index fell 0.1 percent, after increasing 0.4 percent in February. Over the past 12 months, consumer prices have fallen 0.4 percent, the first 12-month decline since a similar drop for the year ending in August 1955.
The report said last month's drop in consumer prices was due in large part to a downturn in the energy index, which declined 3.0 percent in March after rising 3.3 percent the previous month. Gasoline prices fell 4 percent last month, home heating oil plunged 8.5 percent and natural gas slid 4.8 percent.
The food index declined 0.1 percent for the second straight month to virtually the same level as October 2008.
Core inflation, which excludes energy and food, rose 0.2 percent last month, matching the gains of the past three months. It was slightly higher than the 0.1 percent rise economists expected, according to the Associated Press.
More than half of the increase in costs outside of food and energy came from an 11 percent rise in tobacco prices, the report said.
"The numbers speak to an economy that is in deep recession, but we're no longer in the shock mode of staggering numbers that speak to a serious slide lower in terms of macroeconomic activity, coupled with the threat of inflation," Peter Kenny, managing director at Knight Equity Markets in Jersey City, N.J., told Reuters.
Policymakers had expressed repeated concern in early 2008 that rising energy costs could fuel a surge in inflation, but as the economic crisis deepened, analysts began to focus on fears of deflation, when prices fall too quickly amid an economic downturn.
The Federal Reserve has taken drastic measures to help boost the economy, including the deep slashing of interest rates and pumping more than $1 trillion additional dollars into the economy, including $750 billion to purchase mortgage-backed securities and as much as $300 billion in long-term government bonds.
Still, many worry the risk of inflation looms, as the entities like the Fed continues to pump money into the anemic financial system.
"They could create inflation, essentially, by printing so much money that it gets spent and it begins to exceed the ability of the economy to provide goods and services," the Economist's Greg Ip told the NewsHour on March 18. "Then you have too much money chasing not enough goods and service. That creates inflation."
"The real risk to this economy is inflation," Ken Mayland, president of ClearView Economics told the New York Times Wednesday. "When the Fed doubles -- and is en route to -- tripling its balance sheet, I don't fear deflation."
In other data released Wednesday, industrial production fell for the fifth straight month in March.
The Fed reported that production at the nation's factories, mines and utilities dropped a seasonally adjusted 1.5 percent, matching February's decline and worse than the 1 percent drop analysts expected.
The latest economic indicators come as reports emerged that the Obama administration is considering a public release of the "stress tests" being given to banks to assess whether they are adequately capitalized and how well they can withstand further financial jitters.
The New York Times reported that officials are drawing up plans to disclose the conditions of the 19 biggest banks in the country as it tries to restore confidence in the financial system.
"The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest," the paper reported.
