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Consumer prices dropped in March at the fastest pace in more than five years, early evidence that the coronavirus is launching the U.S. economy into a period of deflation—a potentially damaging and self-reinforcing cycle of declining prices.

The Labor Department said Friday that the consumer-price index fell 0.4% last month from the previous month, pushed lower by a sharp decline in energy prices. The CPI’s energy basket fell 5.8% from February as gasoline prices slid 10.5%.

The drop is slightly more dramatic than economists anticipated. Those surveyed by Bloomberg expected a 0.3% decline in total CPI from a month earlier.

Even excluding prices for both energy and food—the cost of groceries rose 0.3% as lockdowns continued and people stocked up—so-called core consumer prices fell 0.1% last month, the worst decline in more than a decade. Economists often exclude food and energy prices and look at the core numbers to smooth out bumps from those more volatile components, even though those items comprise sizable chunks of many Americans’ spending.

The fall in the core number was more surprising than the slide in total CPI, said Ian Lygen, head of U.S. rates strategy at BMO Capital Markets. Prices fell across a variety of categories, from apparel to new vehicles to airline fares.

The March CPI report shows that disinflationary forces are already taking hold. While deflation, or a prolonged fall in consumer prices, might sound good, it can result in a vicious downward spiral where businesses make less money and consumers save more and spend less.

The report “underscores that the fallout from the coronavirus has had a large disinflationary effect on prices due to the large demand shock, plunge in oil prices, and stronger dollar,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics.

“The disinflationary impulse, along with the great disruption in economic and financial market activity, is a key reason why the Fed is unleashing vast new monetary policy stimulus,” she said.

While aggressive stimulus measures will eventually spur inflation, many economists say that isn’t going to happen soon.

Still, consumers continue to face rising prices in some key areas. In addition to food prices, where the impact of stay-home orders and restaurant closures came through in March as pasta and rice prices rose 1.8% from February, eggs increased by 2.8% and fruit cost 4.6% more, the price of health care continued to increase.

Prices for medical services increased 0.5% from February while hospital services rose 0.4%. Those increases came as rents rose 0.3%, consistent with the pace of inflation before the coronavirus pandemic. Those gains helped to slightly offset declines elsewhere last month.

“Overall, this is a troubling print for the Fed’s ambitions of rekindling inflation; however the mid-outbreak timing of the data suggests there will be more downside ahead,” Lyngen said.

Write to Lisa Beilfuss at lisa.beilfuss@barrons.com