* U.S. inflation unchanged, retail sales fall
* U.S. consumer sentiment index slips as well
* December rate hike expectations fall after U.S. data (Adds details, comments, byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, July 14 (Reuters) - U.S. Treasury yields dropped to multi-week lows on Friday as benign U.S. inflation data in June and an unexpected fall in retail sales fueled doubts about an interest rate increase later this year.
Yields, which move inversely to prices, on the benchmark 10-year note, including those on the 3-year and 7-year notes fell to two-week lows. U.S. two-year note yields, the tenor most sensitive to rate hike expectations, tumbled to three-week lows.
U.S. inflation was unchanged in June, following a 0.1 percent dip in May. The so-called core CPI, which strips out food and energy costs, edged up just 0.1 percent in June. The core CPI increased 1.7 percent year-on-year after a similar gain in May.
U.S. retail sales also underperformed, falling for a second month in June. Retail sales dropped 0.2 percent last month.
“This data does put into question a rate hike in December,” said Tom di Galoma, managing director at Seaport Global Holdings in New York. “I have been saying this: inflation isn’t around. The only inflation I see is in college education.”
The rate futures market saw a 47 percent chance the Federal Reserve would raise key overnight borrowing costs by at least a quarter point at its Dec. 12-13 meeting, down from about 55 percent at Thursday’s close, according to the CME Group’s FedWatch.
The U.S. consumer sentiment index also took a dip this month, with a 93.1 reading, from the previous month’s 95.1, highlighting the overall bearish tone of Friday’s U.S. data.
In mid-morning trading, U.S. 10-year yield fell to 2.303 percent, from 2.348 percent late on Thursday. It earlier fell to 2.279 percent, its lowest since June 30.
U.S. two-year yields slid as well, down to 1.339 percent , from Thursday’s 1.367 percent, after sliding to a three-week trough of 1.323 percent.
The yield gap between shorter-dated and longer-dated Treasuries shrank on Friday after the data, with the spread between 2-year and 10-year yields at 95.7 basis points, its flattest level in more than a week.
A flat yield curve suggests investors are buying long-dated securities because there is no fear of inflation. (Editing by Bernadette Baum)