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Gold prices fell on Friday but were headed for a third straight week of gains as cooler-than-expected U.S. inflation data boosted hopes of the Federal Reserve cutting interest rates in September.

Spot gold slipped 0.4% to $2,404.12 per ounce, as of 0702 GMT, on profit booking after prices jumped 2% on Thursday.

U.S. gold futures fell 0.6% at $2,408.00.

Data on Thursday showed U.S. consumer prices unexpectedly fell and the annual increase was the smallest in a year, drawing the Fed another step closer to cutting interest rates.

"Inflation outlook and interest rate picture have moved in favour of gold this week. As we move closer to a lower interest rate environment, conditions could be ripe for gold to set new record highs before the year is out," said Tim Waterer, KCM Trade's chief market analyst.

Bets of a September rate cut rose to 93% compared to a 70% chance before the data was released, according to the CME FedWatch Tool.

Lower interest rates reduce the opportunity cost of holding the non-yielding bullion.

San Francisco Fed Bank President Mary Daly on Thursday said that she expects further easing in both price pressures and the labor market to warrant interest rate cuts. Meanwhile, Chicago Fed Bank President Austan Goolsbee said the U.S. economy looks like it is back on track to 2% inflation.

Investor focus is now on the U.S. producer price index (PPI) reading due at 1230 GMT.

"The PPI figures could be key in determining which side of the $2,400 level gold ends the week at," Waterer said.

Spot silver fell 2% to $30.80 per ounce, after scaling an over one-month high on Thursday.

Platinum was 1.1% lower at $993.04 and palladium was down 2.4% to $971.39. Both metals were set to register weekly declines.

Analysts at Citi see 0-3 month point-price targets at $1,050 per ounce for platinum and palladium.