* Core CPI rose less than expected

* Tariff inflation impact eases

* Fed policy outlook unchanged

* Futures pricing in 66% odds of hike by December

By Karen Brettell

NEW YORK, June 10 (Reuters) - U.S. Treasury yields dipped on

Wednesday after data showed core consumer price inflation eased

more than economists had expected last month, while traders also

kept a close eye on escalating tensions with Iran.

The consumer price index rose 0.5% in May, putting the annual

inflation rate at 4.2% - the highest level since April 2023 and

above the 3.8% reading from April.

Stripping out volatile food and energy prices, the core CPI

rose 0.2% for the month and 2.9% from a year ago - below the

0.3% monthly estimate and less than the 0.4% April increase.

"Some relief was expected in the core inflation number this

morning and this report mostly delivered that relief," said Matt

Bush, U.S. economist at Guggenheim Investments.

The data showed that the effects of tariffs on prices

continued to fall while technology-related inflation eased.

Services prices, however, remained elevated, with higher energy

costs feeding through to airfares, Bush said.

Rental inflation also moderated, but less than some analysts

had expected, indicating likely further progress in the months

ahead.

"Some good news in the data, still some areas to be worried

about," Bush said. "Overall, probably has not much bearing on

the near-term path of Fed policy."

Fed funds futures traders are pricing in 66% odds of a

Federal Reserve hike by December, little changed from Tuesday.

The 2-year note yield, which typically moves in

step with Fed interest rate expectations, fell 0.4 basis points

to 4.118%.

The yield on benchmark U.S. 10-year notes fell

0.5 basis points to 4.523%.

The yield curve between 2- and 10-year notes

was little changed at 40 basis points.

Yields had risen earlier on Wednesday as hostilities between

the United States and Iran rose, though they remained relatively

contained on hopes that a resolution to the war will be reached.

U.S. President Donald Trump said on Wednesday Iran had taken too

long to negotiate a deal and would now "have to pay the price."

Iran said it would reassess diplomatic engagement with the

United States after overnight tit-for-tat strikes.

Traders will also watch a $39 billion auction of 10-year

notes later on Wednesday for signs of how strong demand for

longer-dated U.S. Treasuries remains. The debt suffered a sharp

selloff last month.

The U.S. government saw average demand for a $58 billion

sale of three-year notes on Tuesday. It will also sell $22

billion in 30-year bonds on Thursday.