TREASURIES-Yields jump on surging consumer price inflation

(Adds details on data, quotes, updates prices)

* Consumer prices post largest gain in 4 years

* Chances of Fed rate increase in March seen increasing

* Goldman, JPMorgan (LSE: JPIU.L - news) bring forward hike expectations

By Karen Brettell

NEW YORK, Feb 15 (Reuters) - Benchmark U.S. Treasury yields

rose to 2-1/2-week highs on Wednesday after data showing surging

consumer price inflation in January bolstered expectations that

the Federal Reserve is closer to raising interest rates.

The Labor Department said its Consumer Price Index jumped

0.6 percent last month after gaining 0.3 percent in December.

January's increase in the CPI was the largest since February

2013.

“CPI was much higher than expected, both the headline itself

as well as the core number,” said Mary Ann Hurley, vice

president in fixed income trading at D.A. Davidson in Seattle.

Data from the Commerce Department showed that retail sales

rose 0.4 percent last month as households bought electronics and

a range of other goods.

Benchmark 10-year notes were last down 11/32 in

price to yield 2.51 percent. Those yields earlier rose as high

as 2.52 percent, the highest since Jan. 27.

“The 10-year over 2.50 (percent) directed some buying and

there were some unwinds of some cross-market trades that were

going on,” said Tom Tucci, head of Treasuries trading at CIBC (Dusseldorf: CAI.DU - news) in

New York.

Much of the inflation increase in the CPI data was

attributable to a jump in gas prices, which may not prove

sustainable, Tucci said.

Wednesday’s data came after Fed Chair Janet Yellen adopted a

more hawkish tone than expected during testimony to lawmakers in

Washington on Tuesday, which raised expectations that the U.S.

central bank will hike interest rates in the coming months.

"She (Munich: SOQ.MU - news) definitely seemed to indicate that there were rate

hikes coming, and more than one coming," Hurley said.

Traders are pricing in a 27 percent chance of a rate

increase at the Fed’s March meeting, up from 13 percent on

Monday, according to the CME Group (Kuala Lumpur: 7018.KL - news) ’s FedWatch Tool.

Goldman Sachs (NYSE: GS-PB - news) on Wednesday raised its expectations that the

Fed will hike rates in the first half of 2017, and J.P. Morgan

brought forward its forecast of the next rate increase to May.

Wage growth data in February’s jobs report, which will be

released a week and a half before the Fed’s March meeting, will

likely be crucial in deciding whether the U.S. central bank can

hikes rates that month.

“The wage component of the jobs number will be highly

scrutinized for the potential for the Fed to move,” said Tucci.

Treasury prices rallied earlier this month after January’s

jobs report showed disappointing wage growth.

(Editing by Meredith Mazzilli and Jeffrey Benkoe)

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