Other data on Friday showed a decline in consumer sentiment in early March, as harsh winter weather left households with high utility bills and disrupted shopping and general business activity.
The Labor Department said its producer price index for final demand declined 0.5 percent as profit margins in the services sector, especially gasoline stations, were squeezed, and transportation and warehousing costs fell.
The PPI had dropped 0.8 percent in January. In the 12 months through February, producer prices fell 0.6 percent, the first decline since the series was revamped in 2009.
"The underlying message appears to be that pipeline inflationary pressures remain quite weak, even as energy prices have stabilized and gasoline prices have drifted modestly higher," said Millan Mulraine, deputy chief economist at TD Securities in New York.
Economists had forecast the PPI rising 0.3 percent last month and remaining unchanged from a year ago.
In a separate report, the University of Michigan said its consumer sentiment index fell to 91.2 in early March from a reading of 95.4 in February. But with bad weather mostly blamed for the ebb in sentiment, a rebound is seen as likely.
The inflation data came ahead of next week's Fed meeting, where policymakers are widely expected to signal the U.S. central bank's openness to a June rate hike by dropping a pledge to be "patient" in considering such a move.
But with price pressures remaining muted and retail sales extending their decline in February, some economists believe the central bank could hold off on raising rates until at least September. Inflation is running well below the Fed's 2 percent target.
"The Fed will need to see some firming in core and pipeline inflation before achieving lift-off to assure that the 2 percent target on inflation is indeed within reach," said Diane Swonk, chief economist at Mesirow Financial in Chicago.
The Fed has kept its key short-term interest rate near zero since December 2008.
Strong dollar's impact
Services accounted for 70 percent of the decline in the PPI last month. The volatile trade services component, which mostly reflects profit margins, fell a record 1.5 percent in February, after rising 0.5 percent in January.
It was pulled down by a 13.4 percent drop in margins at gasoline service stations, reflecting a recent plunge in prices at the pump. Profit margins also fell for apparel, footwear and jewelry retailers, as well as for food and alcohol.
There also were declines in machinery, equipment, parts and supplies wholesale margins, signs that a strong dollar was helping to keep a lid on inflation.
A 1.5 percent drop in transportation and warehousing services also weighed on producer prices last month.
Energy prices, which had been a drag on producer inflation in recent months, were unchanged in February.
A key measure of underlying producer price pressures that excludes food, energy and trade services was unchanged after a record 0.3 percent drop in January.
(Reporting by Lucia Mutikani; Additional reporting by Sam Forgione in New York; Editing by Paul Simao)