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Gold prices crawled higher on Thursday from nearly three-week lows touched in the previous session as the dollar and Treasury yields weakened after the U.S. inflation data cemented the case for a Federal Reserve rate pause next week.

Spot gold added 0.2% to $1,909.21 per ounce by 0318 GMT, having hit its lowest level since Aug. 25 on Wednesday at $1,905.10. U.S. gold futures were down 0.1% at $1,930.80.

The U.S. dollar index and 10-year Treasury yields eased after a mixed report from the Labor Department on Wednesday showed that the annual rise in underlying inflation was the smallest in nearly two years, suggesting a Fed rate pause next week. [USD/] [US/]

U.S. consumer prices in August, however, increased by the most in 14 months as the cost of gasoline surged. [O/R]

"The big uncertainty is Fed rate cut trajectory for 2024 and that remains one of the catalysts driving gold volatility," said OCBC Executive Director and FX Strategist Christopher Wong.

"U.S. CPI was largely within expectations and in a way earlier concerns of higher price pressures were alleviated," Wong said, adding that it's too early to concur on Fed rate expectations from the U.S. CPI report as more data including PPI, retail sales is due before the central bank meeting next week.

Traders now see a 97% chance of the Fed leaving rates unchanged on Wednesday, but 40% probability of a rate rise in November, according to the CME's FedWatch Tool.

The European Central Bank is also set to decide later in the day whether to raise its key interest rate to a record peak.

SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 0.3% to 882.00 tonnes on Wednesday. [GOL/ETF]

Elsewhere, spot silver dropped 0.4% to $22.74 per ounce, platinum eased 0.1% to $899.23 and palladium slid 0.5% to $1,253.42.