"The core rate is troublesome, it's got to be a concern," said Evan Rourke, bond strategist at Popular Securities.
So troubled were traders that they knocked benchmark 10-year notes 21/32 lower for a yield of 4.27 percent, up from 4.19 percent on Thursday.
Shorter-dated debt, which is more responsive to interest rate movements, also fell but more mildly, with two-year notes off 3/32 to reflect the greater likelihood of a more hawkish Fed. Two-year yields rose to 3.44 percent from 3.38 percent.
Annual growth in the core PPI accelerated to 2.7 percent, the fastest clip since 1995, and follows signs of gathering pressures from import prices. Just two days ago, Fed Chairman Alan Greenspan expressed concerns that the lower dollar was finally starting to feed through to inflation.
The data fuelled another bout of profit-taking on long-term debt as investors unwound massive recent bets on a flattening of the yield curve.
Fed funds futures were fully pricing in a June rate hike for the first time, and showing about a 10 percent chance of a larger 50-basis point interest rate hike in March.
The inflation news completely overshadowed a soft reading on US consumer sentiment. The University of Michigan index of consumer confidence dipped to 94.2 in February from 95.5 the previous month. But analysts note such surveys have little correlation to actual spending habits.
"The consumer is holding steady and we're in pretty good shape," said Steve Gallagher, chief US economist at SG Corporate & Investment Banking.
The bond market was also pressured by France's decision to start issuing 50-year bonds, since traders feared it could herald more longer-term issuance elsewhere and perhaps even the return of the 30-year Treasury bond after a three-year hiatus.
But Treasury Secretary John Snow was quick to dismiss the idea. "We don't view the 30-year bond as the best way to fund the debt obligations of the United States," Snow told an audience in New York, where he had come to discuss a proposed overhaul of Social Security, adding that the government would rely on the 10-year note.
Thirty-year debt dropped 1-7/32 to yield 4.65 percent, while five-year notes fell 12/32 to yield 3.86 percent.
Before the inflation data, bond investors had been looking for the Fed to continue to be gradual in raising rates, at least judging from the tone of Greenspan's testimony to Congress this week.
While analysts said one month's data does not immediately affect the nation's monetary policy prospects, they noted sustained price gains could tilt the central bank toward a more assertive tightening.