Stock futures added to gains on the weaker-than-forecast inflation data, while U.S. government debt prices were steady at lower levels. The dollar was also steady after the reports.
Analysts polled by Reuters had forecast the closely watched consumer price index, the government's key gauge of inflation, to be unchanged in August after a 0.1 percent gain in July.
Excluding volatile food and energy price, core inflation advanced 0.2 percent last month matching the forecast and July's rise, the Labor Department said.
But calculating core inflation's change more precisely showed its gain remained a mild 0.1503 percent.
"Core CPI came in at a low 0.2% and will help to alleviate concerns that the Fed has taken major risks with its inflation objectives," said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
"On the face of it, it helps support (Fed Chairman Ben) Bernanke's credibility," he said.
Energy prices fell 3.2 percent in August, the biggest drop since October, while food prices rose 0.4 percent, partly on a big increase in dairy products.
However, U.S. oil prices topped a fresh record above $82 a barrel on Tuesday, in a warning that rising fuel costs may yet pressure inflation.
Consumer prices in the 12 months since August 2006 were up 2.0 percent while core CPI gained 2.1 percent. These results compare with a forecast for a 2.1 percent year-on-year rise in headline CPI and 2.2 percent increase in core.
The Fed cut borrowing costs partly in response to fallout from the slumping housing market and August housing starts confirmed that the sector remained in trouble.