WASHINGTON (Reuters) - U.S. import prices unexpectedly fell in March, pulled down by decreasing costs for energy products, the latest indication that inflation was subsiding before President Donald Trump's sweeping tariffs came into effect.

The report from the Labor Department on Tuesday added to March's benign consumer and producer prices data. Economists expect tame readings in March in the key inflation measures tracked by the Federal Reserve for its 2% target.

"There is likely to be a very painful and costly transition for the U.S. economy as Trump 2.0 tries to turn back the clock and go back to making things in America," said Christopher Rupkey, chief economist at FWDBONDS. "Import prices are not adding much to inflation for now, but the future outlook remains very much in doubt and not in a good way."

Import prices dipped 0.1% last month, the first decline since September, after a downwardly revised 0.2% gain in February, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast import prices, which exclude tariffs and are measured close to the beginning of the month, would be unchanged following a previously reported 0.4% increase in February.

In the 12 months through March, import prices advanced 0.9% after increasing 1.6% the prior month.

The import price data cemented economists' expectations that the Personal Consumption Expenditures (PCE) price index excluding food and energy edged up 0.1% in March after shooting up 0.4% in February. That would slow the annual increase in so-called core PCE inflation to 2.6% from 2.8% in February.

The White House's import duties campaign has triggered a damaging trade war with China and plunged financial markets into turmoil. Investors are fearful of high inflation and tepid growth or even a recession.

Minutes of the Federal Reserve's March 18-19 meeting published last week showed policymakers were nearly unanimous that the economy faced risks of simultaneously higher inflation and slower growth, commonly referred to as stagflation.

Inflation and growth fears were amplified by a separate survey from the New York Fed on Tuesday showing businesses in New York state in April expected conditions to deteriorate over the next six months.

A measure of future general business conditions slumped to its second-lowest reading in the survey's more than 20-year history.

Businesses also noted worsening supply availability. The survey's measures of prices paid for inputs and received for goods sold jumped to more than two-year highs.

"It is reasonable to think that the new tariffs, supply chain disruptions and intense uncertainty around the future state of trade policy are all weighing heavily on the sector, and are likely to push up core goods inflation considerably," said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.  

CHEAPER FUELS

Stocks on Wall Street were trading higher. The dollar advanced against a basket of currencies after slumping in recent days on trade policy jitters. U.S. Treasury yields fell.

Financial markets expect the U.S. central bank to resume cutting interest rates in June after pausing in January, and reduce its policy rate by 100 basis points this year.

The Fed's benchmark overnight interest rate is currently in the 4.25%-4.50% range.

Imported fuel prices declined 2.3% in March after increasing 1.6% in February. Oil prices have decreased on worries that escalating trade tensions would weigh on global economic growth and therefore hurt demand for fuels.

Food prices edged up 0.1% after being unchanged in the prior month. Excluding fuels and food, import prices gained 0.1% for a second straight month. In the 12 months through March, core import prices rose 1.1%.

Further increases are likely as the dollar has weakened considerably against the currencies of the United States' main trade partners. The trade-weighted dollar is down by about 2.6% so far this year, with most of the depreciation in March and the first weeks of April as Trump doubled down on tariffs.

"The U.S. dollar is at its weakest point since last October, which will further increase the cost for producers, who purchase goods from abroad," said Matthew Martin, a senior economist at Oxford Economics.

Prices for imported capital goods rebounded 0.3% after slipping 0.1% in February. Prices for imported automotive vehicles, parts and engines fell 0.1%. Imported consumer goods prices, excluding automotives, dropped 0.2%.

Prices for imported finished metals related to durable

goods increased 1.3%.

"Any tariffs that were charged in March, including a 20% tariff on Chinese imports, and 25% on iron, steel and aluminum, are on top of the prices reported here," said John Ryding, chief economic advisor at Brean Capital.

Prices for Chinese imports fell 0.2% after dipping 0.1% in February. They decreased 0.9% year-on-year. But imports from Japan cost 0.5% more and prices increased 1.7% from a year ago.

The cost of goods imported from the European Union was unchanged. Prices for Canadian imports tumbled 1.5% while goods from Mexico were 0.3% cheaper.

The report also showed export prices were unchanged in March after increasing 0.5% in February. Prices for agricultural exports were flat as higher prices for soybeans offset lower prices for wheat and rice.

Nonagricultural export prices dropped 0.1% amid lower prices for industrial supplies and materials as well as nonagricultural foods. Prices for motor vehicles, capital and consumer goods exports rose.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)