NEW YORK (CNN/Money) - Bonds fell Friday after reports pointed to an expanding manufacturing sector and higher consumer inflation.

The dollar gained against the euro and yen.

The benchmark 10-year Treasury note lost 7/32 of a point to 99-12/32 to yield 4.32 percent, up from 4.29 late Thursday. The 30-year bond fell 10/32 of a point to 112-3/32 to yield 4.56 percent, up from 4.54 in the previous session. Bond prices and yields move in opposite directions.

In shorter-dated debt, the two-year note slipped 3/32 of a point to yield 4.17 percent, and the five-year note lost 5/32 to yield 4.19 percent.

The Chicago Purchasing Managers Index, or Chicago PMI, jumped to 60.5 in September. Economists were looking for a reading of 52, according to Briefing.com. A reading of 50 is the breakeven point between an expanding and contracting manufacturing sector, and the strong number raised the prospect of rising inflation.

U.S. consumer spending dropped a greater-than-expected 0.5 percent in August, the biggest fall since November 2001, the Commerce department said Friday.

Income in August also fell 0.1 percent as rental and proprietors' income fell, the report said.

But although the drop in spending and income could mean less inflationary pressure, the report also said energy prices pushed consumer inflation up 0.5 percent, the largest jump since September 1990.

Outside volatile food and energy costs, inflation as measured by the Federal Reserve's favorite gauge edged up 0.2 percent. Economists had predicted a rise of 0.1 percent.

The readings led traders to believe the Federal Reserve will continue with its policy of measured interest rate hikes.

"As people read the economic numbers, they know the Fed is still there," George Goncalves, a Treasury strategist at Banc of America Securities in New York, told Reuters.

Bond traders fear inflation as it erodes the value of the fixed interest-paying investment.

In currency trading, the dollar gained on the euro and yen.

The euro traded at $1.2022, down from $1.2045 late Thursday, while the dollar rose to ¥113.50, compared with ¥112.98 in the previous session.

The dollar remains near two-month highs as traders bet the Fed will continue to raise interest rates, making dollar denominated investments more attractive to foreign investors.

-- From staff and wire reports

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