WASHINGTON (Reuters) -U.S. consumer prices unexpectedly fell in March amid cheaper gasoline and used motor vehicles, but the improvement in inflation is unlikely to be sustained after President Donald Trump doubled down on tariffs on imported Chinese goods.

The first monthly decline in prices in nearly five years reported by the Labor Department on Thursday could also be a sign of softening demand amid heightened recession fears due to tariffs, and led financial markets to anticipate the Federal Reserve could cut interest rates by 100 basis points this year.

"The good news of an inflation soft print in March needs to be taken with a grain of salt because the trade war against China from where most consumer goods that Americans buy come from has gone into hyper drive," said Christopher Rupkey, chief economist at FWDBONDS.

The consumer price index dipped 0.1% last month, the first drop since May 2020, after gaining 0.2% in February, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the CPI edging up 0.1%.

Gasoline prices fell 6.3%. Crude oil prices have declined on growing concerns the global economy is slowing. Cheaper gasoline prices more than offset increases in the costs of natural gas and electricity.

Food prices rose 0.4% after climbing 0.2% in February. Grocery store prices increased 0.5%, boosted by a 5.9% rise in the cost of eggs. There were also solid increases in the prices of meat, fish and dairy products. But fruit and vegetable prices decreased as did those for cereals and bakery products.

In the 12 months through March, the CPI advanced 2.4% after rising 2.8% in February.

March's data likely captured only a fraction of the first wave of Trump's barrage of import duties, including a 20% tariff on Chinese goods, and levies on steel and aluminum.

Trump on Wednesday said he had paused targeted tariffs on trade partners for 90 days, less than 24 hours after steep new duties kicked in and plunged financial markets into turmoil.

But Trump jacked up duties on Chinese merchandise to 125% from 104% after Beijing hit back with an 84% tariff on U.S. goods. The European Union paused its first countermeasures against U.S. tariffs, though the bloc was not mentioned in Trump's statement.

A 10% blanket duty on almost all U.S. imports remains in place. Trump's tariffs, which he sees as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining U.S. industrial base, have raised the odds of a recession over the next 12 months.

The dollar fell against a basket of currencies. U.S. Treasury yields declined.

HIGHER INFLATION ANTICIPATED

Capital Economics estimated that inflation will peak at about 4%, double the Federal Reserve's 2% target. Minutes of the U.S. central bank's March 18-19 meeting published on Wednesday showed policymakers were nearly unanimous that the economy faced risks of simultaneously higher inflation and slower growth.

They noted "participants judged that inflation was likely to be boosted this year by the effects of higher tariffs," and "their contacts were already reporting increases in costs, possibly in anticipation of rising tariffs."

Financial markets expect the Fed to resume cutting interest rates in June having paused its easing cycle in January to give officials time to assess the economic impact of the White House's policies. The Fed's policy rate is currently in the 4.25%-4.50% range.

Excluding the volatile food and energy components, the CPI gained 0.1% in March after climbing 0.2% in February. The so-called core CPI inflation was restrained by a 0.7% decline in the prices of used cars and trucks.

Airline fares dropped 5.3% while motor vehicle insurance and recreation cost less. New motor vehicle prices rose slightly and the cost of household furnishings was unchanged. The cost of hotel and motel rooms declined 3.5%.

But owners' equivalent rent rose 0.4% and the cost of personal care surged 1.0%. There were also increases in the prices of education and healthcare, mostly hospital services. Prescription medication prices dropped 2.0%.

Core CPI inflation increased 2.8% year-on-year in March, the smallest advance since March 2021, after rising 3.1% in February.

Higher goods prices were not expected to spill over to services as a softening labor market puts a lid on wage gains. Goods inflation was, however, seen offsetting the anticipated services disinflation.

A separate report from the Labor Department showed the labor market holding steady in early April, though economists are bracing for layoffs because of the import duties. Initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 223,000 for the week ended April 5.

The Trump administration's tariffs campaign has severely eroded business and consumer sentiment, which could weigh on investment, spending and demand for labor.