By Chuck Mikolajczak

NEW YORK, April 10 (Reuters) - U.S. Treasury yields edged slightly higher on Friday after a reading on inflation showed a surge in prices in line with expectations, while investors awaited weekend peace talks between the U.S. and Iran.

The Labor Department said the Consumer Price Index (CPI) jumped 0.9% last month, the most in nearly four years, and 3.3% in the 12 months through March, in line with the estimates of economists polled by Reuters, as the war caused a surge in oil prices and tariff pressures continued.

The market reaction was largely subdued, with yields initially moving slightly lower before reversing course and turning higher on the day as the jump in prices was largely anticipated.

"Hot headline with a calm core makes it a non-event," said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.

"Any worries about March’s inflation number are overshadowed by worries about the weekend and how talks go. That will determine the path of inflation forward."

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 1 basis point to 4.303% and was down about 5 basis points on the week, putting it on track for a second straight weekly decline.

MIDDLE EAST CONFLICTS CLOUD OUTLOOK

The Strait of Hormuz remained shut on Friday and Israel traded fire with Hezbollah in Lebanon, two disputes which the U.S. and Iran each described as violations of their ceasefire deal ahead of peace talks scheduled for Saturday in the Pakistani capital Islamabad.

U.S. crude CLc1 rose 0.14% to $98.01 a barrel while Brent LCOc1 fell to $95.56 per barrel, down 0.36% on the day, and were on pace for their biggest weekly percentage declines since June.

The yield on the 30-year bond US30YT=TWEB climbed 1.1 basis points to 4.909%.

San Francisco Federal Reserve President Mary Daly said in an interview with Reuters that monetary policy is restrictive enough to put downward pressure on inflation without undercutting the labor market.

However, the oil shock from the war lengthens the timeline for inflation to return to the central bank's 2% target, she added.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 51.4 basis points.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, ticked up 0.4 basis points to 3.787% but was down nearly 7 basis points on the week, on track for a second straight weekly decline and the largest since late February.

Markets are pricing in a 29.7% chance for a rate cut of at least 25 basis points at the Fed's December meeting, according to the CME's FedWatch Tool, up slightly from the 27.3% in the prior session.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.611% after closing at 2.613% on Thursday.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.358%, indicating the market sees inflation averaging about 2.4% a year for the next decade.