LONDON, Oct 15 (Reuters) - Euro zone government bond markets were steady on Friday after a volatile week in which they hit their highest levels in months before falling back sharply as investors grapple with consolidating strong inflation readings with economic concerns. Worries around “stagflation” - a rise in consumer prices without a commensurate increase in economic growth - have left investors confused about whether the high inflation readings will lead to sharp monetary policy tightening, particularly in Europe. As a result, euro zone government bond yields have fallen back from a five-month high hit earlier in the week. On Friday, they were marginally higher across the board, but only after two sessions of steep drops. “This week’s bond rally makes the recent sell-off feel more like a pause in investors’ love story with fixed income products than a serious break-up,” ING analysts said in a note. “Markets are rightly concerned about Fed tightening but we lack a near-term catalyst to bring rates higher.” Inflation expectations have soared in recent weeks, with a key market gauge of long-term euro zone inflation, the five-year, five-year forward inflation swap, hitting a six-year high of 1.8417% this week. But much of the expectations stem from supply chain disruptions and a rise in energy prices around the world, which suggests that policymakers may be reluctant to endanger a global economy only just recovering from the COVID-19 crisis. Indeed, European Central Bank President Christine Lagarde said on Thursday that Europe’s inflation upswing is still seen as temporary and there are no signs yet they are becoming embedded in wages. Meanwhile in the United States, policymakers remain divided over what to do about inflation. German government bond yields, having hit a near five-month high of -0.08% earlier this week, was back down at -0.166% on Friday, up 1.5 bps on the day. Other euro zone bond yields were also broadly 1-2 bps higher on the day, but only after having fallen anywhere between 7-12 bps over the previous two sessions., Later on Friday, U.S. retail sales data is due out as is the University of Michigan’s measure of consumer sentiment which has often successfully pointed to slowdowns in economic activity before they happened. (Reporting by Abhinav Ramnarayan; Editing by Andrew Heavens) Our Standards: The Thomson Reuters Trust Principles.