Enable ip mpls propataion ttl on all routers and run the traceroute from x to y. During trace route you will see the first two outputs with 2 labels where in one label will be changing . Now C has to do the PHP so the one label will be removed from C and it will forward the packet to D with one label which is of vpn label. Now D will remove the label and forward the ip packet to y.
The no format of command is recommended in the core so that CPE should not see the intermediate hops.
Because of PHP, you get to see D in the traceroute. Note however, if you are running an MPLS VPN, you do not see D. This is because of the 2 labels, and only the upper label is popped.
For the second question, I do not think it is compulsory to disable ttl propagation on the core routers as well. Ttl propagation has an effect when the IP packet is being labelled. Once labelled, it has no effect.
However, consider if you have a broken LSPs. If you have a broken LSP on the core, the traceroute would show the hops from the 2nd LSP. The best rule of the thumb would be to disable it across board.
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