(Updated at 1500 EDT)

By Karen Brettell

May 14 (Reuters) - Treasury yields fell on Tuesday ahead

of a highly anticipated consumer price inflation report on

Wednesday that analysts say is likely to drive near-term Federal

Reserve policy.

Higher-than-expected consumer prices in the first quarter of

the year raised concerns that the Fed will be unable to cut

interest rates this year unless there is a significant uptick in

the unemployment rate.

Fed Chair Jerome Powell said on Tuesday he expects U.S.

inflation to continue declining through 2024 as it did last

year, though his confidence in that has fallen due to the first

quarter data.

Higher-than-anticipated consumer prices on Wednesday will

likely drive yields higher, but a softer report could also spark

a large bond market rally, especially in light of market

positioning.

"The markets are a little primed for a higher release, that

seems to be what the hedges are all betting against," said Guy

LeBas, chief fixed income strategist at Janney Montgomery Scott

in Philadelphia.

Economists polled by Reuters expect the closely watched core

CPI to rise by 0.3% in the month, down from 0.4% in March, for

an annual gain of 3.6%, down from 3.8%.

Weaker-than-expected jobs growth in April led investors to

raise bets for two 25 basis point cuts this year, but the

trajectory of inflation will be key to whether that occurs.

Traders are now pricing in 45 basis points of cuts this year,

down from around 46 basis points on Monday.

Benchmark 10-year yields jumped to an 11-day high earlier on

Tuesday after data showed that producer prices rose more than

expected in April.

Producer prices showed strong gains in the costs of services

and goods. The producer price index (PPI) for final demand rose

0.5% last month after falling by a downwardly revised 0.1% in

March.

LeBas said the producer price inflation report doesn't mean

that Wednesday's consumer price index (CPI) will be higher than

anticipated, noting that "historically surprises in the PPI are

uncorrelated with surprises in the CPI."

It also follows a cool reading in March, which when added

together leaves the index close to its recent trends. "It looks

like we've got some month-to-month chop rather than anything

meaningful," LeBas said.

Benchmark 10-year note yields were last down 4

basis points on the day at 4.445%, after reaching 4.534% in the

aftermath of the data, the highest since May 3.

Two-year yields fell 4 basis points to 4.819%,

after going as high as 4.899%, the highest since May 2.

The inversion in the yield curve between two-year and

10-year notes was little changed on the day at

minus 38 basis points.