(Updates rates) Sept 14 (Reuters) - Benchmark German 10-year yields fell from two-month highs on Tuesday after U.S. inflation cooled off more than expected, while Italy’s risk premium fell to a one-month low after a well-received debt auction. The data showed the rise in U.S. consumer prices slowed to 0.3% in August from 0.5% in July, below the 0.4% a Reuters poll had projected. The data was in focus ahead of next week’s U.S. Federal Reserve meeting and crucial to euro zone bond investors as yields in the euro zone track U.S. Treasuries closely. “It’s a fairly positive report in the sense that the Fed’s wish that inflation is transitory is coming true. If you look at a lot of the areas that were leading the surge in inflation, now they are all starting to come back down to earth,” said Larry Adam, chief investment officer at Raymond James. “It continues to give the Fed maximum flexibility. Our base case expectation is that they are going to discuss (tapering) at the meeting next week but they won’t have an official announcement till the November meeting.” Germany’s 10-year yield was down less than a basis point (bp) at -0.33% by 1526 GMT, reversing an earlier rise as it tracked U.S. Treasury yields lower following the data. Earlier, influenced by a flurry of debt sales, it had risen to two-month high at -0.301%, while the yield curve between two and 10-year yields had briefly widened to 39.5 bps, the widest since early July. The European Union received more than 85 billion euros of investor demand for a new, syndicated seven-year bond to back its coronavirus recovery fund, according to a lead manager memo seen by Reuters, in its first market debt sale since the summer break. Germany raised 3.908 billion from the re-opening of a two-year bond. The 4.804 billion euros of total demand fell short of its 5 billion euro target in what analysts called a “technical failure”. The last four two-year German bond re-openings have all failed, according to Refinitiv IFR. In contrast, Italy raised 5.75 billion euros from the re-opening of three, seven and 30-year bonds to high demand, paying the lowest yields since February, March and January on the respective bonds. The Netherlands raised 1.98 billion euros from the re-opening of a bond due 2052. Italian bonds outperformed after the country’s auction closed with the 10-year yield down 3.5 bps to 0.65%. The Italian auction result “highlights the fact that the ECB was successful in delivering a dovish-taper and that government bonds with a high beta are poised to gain the most,” said Althea Spinozzi, fixed income strategist at Saxo Bank. The European Central Bank slightly slowed the pace of its pandemic emergency bond purchases last Thursday, but calmed fears around a potentially more hawkish move.