WASHINGTON (Reuters) - U.S. consumer prices increased less than expected in April, suggesting that inflation resumed its downward trend at the start of the second quarter in a boost to financial market expectations for a September interest rate cut.

The consumer price index rose 0.3% last month after advancing 0.4% in March and February, the Labor Department's Bureau of Labor Statistics (BLS) said on Wednesday. In the 12 months through April, the CPI increased 3.4% after climbing 3.5% in March. Economists polled by Reuters had forecast the CPI gaining 0.4% on the month and advancing 3.4% year-on-year.

The annual increase in consumer prices has dropped from a peak of 9.1% in June 2022, though progress has stalled. Inflation accelerated in the first quarter amid strong domestic demand after moderating for much of last year.

Last month's slowdown was a relief after data on Tuesday showed a jump in producer prices in April.

Economists say inflation is being driven by providers of services like motor vehicle insurance, housing and healthcare catching up to higher costs.

They expect inflation pressures to ebb this quarter and prices to gradually move toward the Federal Reserve's 2% target as the labor market is cooling.

That sentiment is shared by Fed Chair Jerome Powell who said on Tuesday "I expect that inflation will move back down ... on a monthly basis to levels that were more like the lower readings that we were having last year."

Financial markets expect the U.S. central bank to start lowering borrowing costs in September.

A handful of economists anticipate the Fed will commence its easing cycle in July, while another minority believes a rate cut could come in December, if at all.

The central bank early this month left its benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July. The Fed has raised its policy rate by 525 basis points since March 2022.

Excluding the volatile food and energy components, the CPI rose 0.3% in April after advancing 0.4% in March. In the 12 months through April, the core CPI increased 3.6%. That was the smallest year-on-year gain since April 2021 and followed a 3.8% increase in March.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)