U.S. consumer prices fell for the first time in nearly 1-1/2 years in August and underlying inflation pressures were muted, which could lessen the urgency for the Federal Reserve to raise interest rates.

The Labor Department said on Wednesday its Consumer Price Index dropped 0.2 percent last month as a broad decline in energy prices offset increases in food and shelter costs.

It was the first decline since April last year and followed a 0.1 percent gain in July. Economists had forecast consumer prices being flat in August.

"There is still enough slack in the economy to keep a tight lid on price increases, which should support the view of those within the Fed arguing in favor of patience before the first rate hike," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.

The CPI increased 1.7 percent in the 12 months through August, the smallest advance in five months, after rising 2.0 percent in July.

Inflation has cooled somewhat after an acceleration in the second quarter, which had fanned speculation of an early interest rate hike from the Fed.

Stripping out food and energy prices, the so-called core CPI was unchanged last month for the first time since October 2010 after nudging up 0.1 percent in July.

In the 12 months through August, the core CPI rose 1.7 percent, slowing down from July's 1.9 percent increase. It was also the smallest gain since March.

The Fed targets 2 percent inflation and it tracks an index that is running even lower than the CPI.

The dollar slipped against a basket of currencies on the data, while prices for U.S. government debt rose marginally. U.S. stocks were trading higher.

The CPI report was released ahead of the conclusion of the U.S. central bank's two-day policy meeting. The Fed is scheduled to release its policy statement at 2:00 p.m. EDT, which will be watched for signals on the timing of the first interest rate increase.

Many economists think the Fed could raise interest rates as soon as June of next year, while interest rate futures point to July for the first rate hike. It has kept its benchmark overnight lending rate near zero since December 2008.

WAGE GROWTH SLUGGISH

While the economy appears to be on sustainable growth path, anemic wage growth is dampening price pressures. Average hourly earnings adjusted for inflation increased 0.4 percent in August. They were up only 0.4 percent compared to August last year.

A second report showed homebuilder sentiment jumped to its highest level in nearly nine years in September, with builders reporting a sharp pickup in buyer traffic since early summer.

The surge in confidence underscores the economy's firming fundamentals. For now, however, inflation remains tame.

In August, energy prices fell for a second straight month and recorded their biggest decline since March 2013. There were broad declines in energy prices, with gasoline plunging 4.1 percent after declining 0.3 percent in July.

Food prices rose 0.2 percent after advancing 0.4 percent in July as the effects of a drought in California linger.

The core CPI was dampened by a second straight month of sharp declines in airline fares. Falling apparel and used car prices also weighed. Recreation prices recorded their largest drop since December 2009, while household furnishings declined.

Rents increased 0.2 percent last month after rising 0.3 percent in July. Prices for alcoholic beverages posted their largest increase since January 2007.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)