TREASURIES-Two-year yields fall after consumer price inflation data

(Updated in New York morning time)

*

July consumer price inflation close to expectations

*

CPI data shows limited pass through from tariffs

*

Traders boost bets on September Fed rate cut

By Karen Brettell

Aug 12 (Reuters) - Interest rates sensitive two-year Treasury yields fell on Tuesday after data showed that U.S. consumer price inflation was roughly in line with the expectations of economists in July, and showed limited increases from tariffs, likely clearing the way for the Federal Reserve to cut interest rates in September.

The consumer price index rose 0.2% last month after gaining 0.3% in June, and posted an annual gain of 2.7%, unchanged from the prior month.

Excluding the volatile food and energy components, the CPI rose 0.3%, the biggest gain since January, after climbing 0.2% in June. The so-called core CPI increased 3.1% year-on-year in July after advancing 2.9% in June.

"The July CPI was roughly in line with expectations and did not include very much tariff pass-through to consumer prices and is certainly good enough to lock in the odds of a September rate cut," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

The yield on benchmark U.S. 10-year notes was last up 0.8 basis points on the day at 4.281%, but below the 4.30% area they traded before the data.

The 2-year note yield fell 1.1 basis points to 3.743%.

The yield curve between two-year and 10-year notes steepened by around two basis points to 53.5 basis points. Investors have boosted bets that the Fed will cut rates sooner and potentially more than previously expected after jobs data for July showed that employers added fewer jobs than expected, while job gains for previous months were also revised sharply lower.

"At this point in the cycle, the jobs data matter more than the inflation data," LeBas said.

Fed funds futures traders are now pricing in 94% odds the Fed will cut rates at the U.S. central bank's September 16-17 meeting, up from 86% on Monday, according to the CME Group's FedWatch Tool.

(Reporting by Karen Brettell Editing by Bernadette Baum and Will Dunham)