(Updated at 2:31 p.m. ET/1431 GMT)

By Chuck Mikolajczak

NEW YORK, June 14 (Reuters) - Longer-dated U.S. Treasury

yields edged lower on Friday, after economic data provided the

latest indication that inflation may be cooling, with the

benchmark 10-year Treasury yield on pace for its biggest weekly

drop of the year.

The Labor Department said U.S. import prices dropped 0.4%

last month, below the estimate for a 0.1% rise, following an

unrevised 0.9% jump in April as prices for energy products

retreated, another positive sign for the inflation outlook.

The report comes after data earlier this week indicated the

labor market and price pressures were showing signs of cooling.

A separate preliminary reading of consumer sentiment from

the University of Michigan showed June was weaker than expected

and below the final reading for May, while inflation worries

remained despite the drop in energy prices.

"We are now resuming the trend of moderating inflation, but

clearly after 1Q disappointments the Fed doesn't want to come

across as saying that the battle is won, we can now proceed with

cutting rates without having more confirmation that this recent

improvement in inflation trends are here to stay," said Andrzej

Skiba, head of the BlueBay U.S. fixed income team at RBC Global

Asset Management in Stamford, Connecticut.

"We do not see a reason why September could not be the month

where they cut for the first time but again, they need to see a

few more decent inflation prints to get that confidence."

The yield on the benchmark U.S. 10-year Treasury note

fell 2.3 basis points (bps) to 4.217%. The yield is

down nearly 22 bps on the week, on track for its biggest weekly

fall since mid-December.

On Wednesday, the Federal Reserve held interest rates

steady on Wednesday and pushed out the start of rate cuts to

perhaps as late as December.

Skiba also said concerns about the upcoming parliamentary

election in France was weighing on yields.

The yield on the 30-year bond fell 5 basis

points to 4.351%.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes, seen as an indicator of economic

expectations, was at a negative 47.7 basis points.

The two-year U.S. Treasury yield, which typically

moves in step with interest rate expectations,

rose 0.4 basis points to 4.692%.

Federal Reserve Bank of Cleveland President Loretta Mester

said in an interview on CNBC that the latest round of inflation

data is good news for the economy and the central bank.

Those comments were echoed by Chicago Fed President Austan

Goolsbee, who said, "We would be feeling very good" if there

were a lot more months like May.

Markets are pricing in 69.2% chance for a cut of at

least 25 basis at the Fed's September meeting, according to

CME's

FedWatch Tool

, up from about 50% a week ago.

Fed Governor Lisa Cook is set to speak later on Friday.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.136% after closing at 2.166% on June 13.

The 10-year TIPS breakeven rate was last at

2.185%, indicating the market sees inflation averaging about

2.2% a year for the next decade.