The softer inflation came as welcome news for an economy battered by a credit crunch and real estate woes, analysts said. Some said it could make it easier for the Federal Reserve to cut interest rates.
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"With inflation making its way out of the danger zone, the Fed can totally focus on instilling calm in financial markets," said Jennifer Lee at BMO Capital Markets as a Fed policy meeting got underway.
The drop in the consumer price (CPI) index followed a sharp 0.8 percent jump in July, according to the Labor Department report.
The so-called core CPI index, which excludes volatile food and energy costs, rose 0.2 percent in August after a 0.3 percent increase in July.
Both the headline and core CPI figures were in line with forecasts and indicate a moderation in inflationary pressures after sharp commodity-driven increases earlier in the year.
Over the past 12 months however, consumer prices have risen 5.4 percent and core prices by 2.5 percent.
The August drop was led b