NEW YORK, Oct 14 Reuters - The benchmark 10 year Treasury yield fell on Thursday after data on labor market and inflation eased concerns that the Federal Reserve may need to take action earlier than expected to combat rising prices. Weekly initial claims for state unemployment benefits dropped 36,000 to a seasonally adjusted 293,000 versus expectations of 316,000. Other data showed the producer price index for final demand increased 0.5% in September, after opening 0.7% in August and was just shy of the 0.6% estimate. Shorter-term yields have dipped over the past two days while longer dated yields have risen, which has served to flatten the yield curve, indicating the market is anticipating a rate hike by the Fed. The gap between yields on two- and 10 year Treasury notes, seen as an indicator of economic expectations, touched a two-week high on Wednesday after data showed consumer prices increased solidly in September and were likely to keep moving higher. Today makes more sense, there was a fear that CPI was going to print way worse than consensus, said Jay Hatfield, founder and CEO of Infrastructure Capital Management in New York. The CPI data yesterday wasn't right about the move. It's a little bit of relief rally. The yield on the 10- year Treasury note was down 2.3 basis points to 1.526%. Still, the yield gap on two and ten-year Treasury notes was flat for a third straight day and was at 117.1 basis points after sinking to 116.4, its lowest level since Sept. 24. St. Louis Fed President James Bullard said the current high level of inflation could not abate as quickly as many Federal Reserve policymakers expect, and again urged the central bank to pursue a faster taper of its bond buying program. On Thursday, the San Francisco Federal Reserve Bank president said inflation and employment have made enough progress for the U.S. central bank to start scaling back its monthly bond buying, but is far from ready for interest rate hikes. The yield on the 30-year Treasury bond was down by 0.7 basis points to 2.034%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.4 basis points at 0.354%.