By Daniel Kruger 

U.S. government bond prices rose Thursday after the Labor Department said inflation slowed in September.

The yield on the benchmark 10-year Treasury note fell to 3.167%, according to Tradeweb, from 3.221% Wednesday. Yields fall as bond prices rise.

Yields declined after the Labor Department said Thursday that the consumer-price index rose 0.1% in September. Economists surveyed by The Wall Street Journal expected consumer prices to rise 0.2%. The muted reading suggests that the Federal Reserve might not feel pressure to speed up its pace of interest-rate increases, analysts said.

With inflation remaining "quite contained," Fed officials "should be pretty pleased with the result" of their policy of gradually raising interest rates, said Christopher Sullivan, chief investment officer at the United Nations Federal Credit Union. "It's the bond traders who haven't managed the shift from a deflationary kind of environment to a more normalized kind of environment."

Policy makers penciled in one more rate increase at their meeting in September, and three increases for 2019. Investors early Thursday scaled back bets that the Fed will take an aggressive approach to raising interest rates in the coming year, after the release of the inflation data.

Fed funds futures, which investors use to bet on the path of central bank interest-rate policy, showed that the odds that policy makers will raise rates three times by June 2019 declined after the inflation report to 37% from 41% Wednesday. Should the Fed raise rates at that pace, it would represent a continuation of its policy of boosting its target rate once each quarter.

Bond investors could be becoming overconfident in their ability to understand how the Fed will react to upcoming events, according to Ian Lyngen, head of U.S. government bond strategy at BMO Capital Markets.

While the Fed has stuck to its policy of gradually raising rates this year, the backdrop for their decisions was one of accommodative policy and robust financial conditions, Mr. Lyngen said. As the Fed continues to raise rates, and as the central bank's balance sheet continues to shrink at the pace of about $50 billion a month, it could become more difficult for policy makers to look past turbulent market conditions to continue with rate increases, he said.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

October 11, 2018 11:47 ET (15:47 GMT)