The consumer price index, a widely followed measure of inflation, rose 0.1 percent in July. Economists polled by Reuters expected the index to climb 0.2 percent. The report comes a day after the producer price index, another closely watched inflation metric, fell 0.1 percent last month, with economists expecting an uptick.
"I'm surprised that people are still surprised when these numbers come in below expectations," said Eric Souza, senior portfolio manager at Silicon Valley Bank. "I also think the Fed is changing its tone [on inflation] and will stay on its gradual pace.
Investors were looking forward to the data as they searched for clues about the Federal Reserve's next monetary policy move. As of Friday morning, market expectations for a December rate hike were just 41 percent, according to the CME Group's FedWatch tool.
Dallas Fed President Rob Kaplan said Friday the central bank's key interest rate is getting close to a "neutral" level so the Fed should patiently wait for further evidence that inflation will rise before tightening policy again.
Treasury yields were on edge earlier after President Donald Trump suggested on Thursday his "fire and fury" statement on North Korea was perhaps not tough enough.
Trump tweeted on Friday morning that "military solutions are now fully in place,locked and loaded,should North Korea act unwisely."
Markets worldwide have been tense this week as geopolitical tensions between North Korea and the U.S. continue to heat up. Over the past few trading sessions, investors have been seen to be taking shelter in safe haven government bonds as well as gold.