WASHINGTON (Reuters) - U.S. monthly producer prices unexpectedly fell in March amid a sharp decline in the cost of energy products, but tariffs on imports are expected to drive inflation higher in the coming months.

The producer price index for final demand dropped 0.4% last month after an upwardly revised 0.1% gain in February, the Labor Department's Bureau of Labor Statistics said on Friday.

Economists polled by Reuters had forecast the PPI rising 0.2% after a previously reported unchanged reading in February.

In the 12 months through March, the PPI increased 2.7% after advancing 3.2% in February.

While President Donald Trump this week delayed reciprocal tariffs on trade partners for 90 days, he boosted duties on Chinese goods to 125%. Beijing on Friday hit back with a 125% tariff of its own. A 10% blanket duty on almost all U.S. imports remains in place as does a 25% tariff on motor vehicles, steel and aluminum.

The anticipated surge in inflation could, however, be tempered somewhat by softening domestic demand, evident in March's consumer price report that showed monthly declines in airline fares as well as hotel and motel room prices.

The tariffs, which have hammered financial markets and boosted consumers' inflation expectations, have raised the odds of a recession in the next 12 months. Consumer and business sentiment have also tanked.

Minutes of the Federal Reserve'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.

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.