Both benchmark USA 10-year note and 30-year bond yields, which move inversely to prices, dropped to six-week lows after the US inflation data, while yields on two-year notes, considered the most sensitive to rate hike expectations, sank to an eight-week low.
A member of the Federal Reserve's interest-setting committee said Wednesday it would be appropriate for the central bank to announce next month that it will begin trimming its $4.5 trillion balance sheet, but wait until December before raising a key interest rate again.
But with the labour market near full employment and economic growth accelerating, analysts expect the US central bank will announce a plan to start unwinding its massive bond portfolio at its policy meeting next month.
Chances are that the next few month of inflation readings may be a little higher than the unusually weak readings of recent months - in which case the Fed will still hike rates in December and bond yields may correct higher.
US consumer prices rose slightly in July as higher food costs were partly offset by falling prices for a range of other goods, suggesting benign inflation that could persuade a cautious Federal Reserve to delay raising interest rates until December.
While picking up more quickly than personal consumption expenditure (PCE) - the Federal Reserve's preferred measure of inflation - the consumer price index (CPI) remained stubbornly below the Fed's target rate of 2%.
USA consumer prices miss forecasts; dollar down to one-week low
"The Fed may want inflation to pick up but that would not be good news to households", Naroff said. A rising chorus of Fed officials has started to voice more uncertainty upon the bank's capability to reach its inflation target in the near-to-medium term, stated Nordea Bank.
"Overall, although core inflation remains soft, Fed expectations of a rebound early next year look reasonable enough", said Paul Ashworth, Chief US Economist at Capital Economics. The Fed meets again in September. Mobile phone prices continued to decline in July, falling 0.3 per cent.
The euro was up 0.45 percent at $1.1823 after Morgan Stanley raised its forecasts for the currency, predicting it would hit $1.25 early next year.
The Labor Department said its consumer price index inched up by 0.1% in July after coming in unchanged in June. Medical costs showed a 0.3 percent increase in medical services and an even bigger 1 percent jump in medical products such as drugs.
Dow e-minis were down 24 points, or 0.11 percent, with 22,166 contracts changing hands.
Police arrest suspect from Paris vehicle ramming attack that injured 6
Macron has said that a state of emergency imposed after attacks in Paris in November 2015 will be allowed to lapse in November. A French official described the man as the chief suspect in the auto attack and said he was wounded in gunfight.