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NEW YORK, Aug 11 (Reuters) - U.S. interest rate futures rose on Friday with some contracts hitting a two-month high as data showed U.S. inflation remained weak, stoking traders to dial back their view the Federal Reserve would raise key overnight borrowing costs at year-end.
The government's Consumer Price Index, its broadest inflation gauge, fell short of economists' expectations for a fifth consecutive month. This reinforced traders' perception that domestic price growth would stay stuck below the Fed's 2 percent goal for longer than previously thought.
The Labor Department said on Friday CPI edged up 0.1 percent last month after being unchanged in June, missing the 0.2 percent increase forecast among analysts polled by Reuters.
"The evidence for higher rates is not there," said Robert Tipp, chief investment strategist at PGIM Fixed Income in Newark, New Jersey. "A December rate hike is being priced out of the market."
At Friday's close, federal funds futures suggested traders saw a chance a 36 percent the U.S. central bank would increase short-term rates at its Dec. 12-13 policy meeting, compared with 42 percent shortly before the release of the July consumer price index.
In June, the Fed raised the fed funds rate target by a quarter point for a second time this year to 1.00-1.25 percent.
Fed funds futures implied traders did not fully price in another rate increase until late 2018. (Reporting by Richard Leong; editing by Chizu Nomiyama)