The latest inflation report suggested that the cooling of price pressures in spring and summer was a temporary blip and that the U.S. central bank would increase rates at the end of this year.
"Today's report should ease some of the low inflation concerns among wavering Fed officials, and we continue to expect the leadership will prevail in getting another hike in at the December meeting", said Michael Feroli, an economist at JPMorgan in NY.
August CPI rose 0.4 percent and core, excluding fuel and food, rose 0.248 percent, the Labor Department reported Thursday. August's gain was the largest in seven months and lifted the year-on-year increase in the CPI to 1.9 per cent from 1.7 per cent in July.
The core PCE rose 1.4 per cent in July, the smallest year-on-year increase since December 2015.
Labour Department officials said it was hard to say whether Harvey, which slammed Texas towards the end of August, impacted on petrol prices last month.
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Oil prices also built on recent gains after the International Energy Agency forecast stronger demand. The rise was driven by a 2.8 percent month sharp rise in energy prices that came after the Hurricane Harvey that hampered almost 20 percent of US refining capacity.
Stripping out the volatile food and energy components, consumer prices increased 0.2 per cent last month. The cost of rental accommodation surged 0.4 per cent in August.
Last month, food prices rose 0.1 per cent after rising 0.2 per cent in July.
The headline CPI inflation rate was up 0.2 percentage points to 1.9 percent year-on-year in August, as compared with consensus expectations of 1.8 percent.
Over the course of the next few months, core inflation rates could move further below the 2 percent target, driven by adverse base effects due to the relatively sharp price rises in the second half of 2016.
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The chances of a rate hike in December rose to 50.9 percent from 41.3 percent before the release of the data, according to CME Group's FedWatch tool.
The dollar index, which tracks the greenback against six major currencies, was down 0.42 percent at 92.136.
The CPI data is the last to be released before the Fed's September 19-20 policy meeting, where it is expected to outline a program to start offloading its $4.2 trillion balance sheet.
Low inflation, despite the labour market being near full employment, is seen causing the Fed to delay raising rates for a third time this year until December.
Claims have now been below 300,000, a threshold associated with a robust labour market, for 132 consecutive weeks.
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