Core wholesale prices, which exclude volatile food and energy prices, rose more than expected, further dampening hopes for a 50 basis point rate cut next week.
The U.S. government's producer price index, which tracks the costs of goods and services from domestic producers, rose 0.2% last month, in line with economists' expectations, according to a Wall Street Journal poll.
But wholesale prices excluding volatile food and energy prices, a measure closely watched by economists to gauge underlying inflation trends, rose 0.3% in August from the previous month, slightly above the 0.2% forecast.
U.S. stock indexes were little changed on Thursday morning. The Dow Jones Industrial Average was down less than 1%, while the S&P 500 and Nasdaq 100 were each up less than 1%.
The nation's jobs market continues to weaken, with jobless claims announced on Thursday coming in at 230,000, as expected.
Core CPI data released on Wednesday – an inflation measure that excludes volatile food and energy prices – rose 3.2% year-on-year and 0.3% month-on-month.
The monthly figure was slightly above expectations of a 0.2% increase, helped by persistently high home prices.
Following the core inflation data, traders see an 87% chance that the Fed will cut rates by 25 basis points when it meets on Sept. 17-18, according to CME's FedWatch tool, which would be the first cut since March 2020.
According to the U.S. Bureau of Labor Statistics, unadjusted wholesale price inflation over the past year fell to 1.7% from 2.1% in the previous month, the lowest level in six months.
The 12-month rate increased slightly from 3.2% to 3.3%.
Services prices rose 0.4% in August, bringing the 12-month increase to 2.7%, closer to pre-pandemic levels.
“The August producer price index data will provide further encouragement to the Fed that inflation is under control,” said Paul Ashworth, chief North American economist at Capital Economics. He told MarketWatch.
Federal Reserve Chairman Jerome Powell signaled that an interest rate cut is possible in September if inflation continues to ease and the job market continues to cool.
“The time has come to adjust policy,” Mr. Powell said in late August.
The central bank kept the benchmark overnight rate at the current range of 5.25%-5.50% for one year, before raising it by 525 basis points in 2022 and 2023.
Investors are hoping the Fed will deliver a much-needed 50 basis point interest rate cut, on top of its usual 25 basis point cuts, as inflation measures ease and the job market cools.
The Fed's aggressive rate hikes in 2022 and 2023 following the pandemic have suppressed demand, stagnating hiring and contributing to a slowdown in the labor market.
Economists expect the U.S. to face a recession after a series of rate hikes, but easing inflation is raising hopes the Fed can achieve a soft landing.
The Fed is sticking to its goal of lowering inflation to 2 percent, but investors had been hoping the August inflation data would prompt the central bank to cut rates when it meets next week.
