U.S. producer prices were flat in August, pointing to benign inflation pressures that could weigh on the Federal Reserve's decision whether to hike interest rates next week.

The unchanged reading in the producer price index last month followed a 0.2 percent gain in July, the Labor Department said on Friday. The drag on producer prices from lowercrude oil prices and a strong dollar was offset by an increase in profit margins for apparel, footwear and accessories retailing.

In the 12 months through August, the PPI fell 0.8 percent after a similar decline in July. It was the seventh straight 12-month decrease in the index.

Tame inflation despite a rapidly tightening labor market poses a dilemma for Fed officials who are contemplating raising rates for the first time in nearly a decade.

Though job openings are at a record high and the unemployment rate is at a 7-1/2-year low, wage gains have been lackluster. That has helped keep inflation well below the Fed's 2 percent target.

The U.S. central bank's policy-setting committee meets on Sept. 16-17. The likelihood of a lift-off in the Fed's benchmark overnight interest rate has been diminished by recent financial market volatility, which was sparked by concerns over China's economy.

U.S. stock index futures extended losses after the PPI data, while the dollar added to gains against a basket of currencies. Prices for U.S. government debt rose.

Economists polled by Reuters had forecast the PPI dipping 0.1 percent last month and falling 0.9 percent from a year ago.

Producer inflation is likely to remain muted in the near term after a report on Thursday showed import prices fell 1.8 percent in August, the largest drop since January.

The index for final goods fell 0.6 percent last month, with a 7.7 percent decline in gasoline prices accounting for nearly two-thirds of the drop. There also were decreases in the cost of jet fuel, grains, light motor trucks, and iron and steel scrap.

Wholesale food prices rose 0.3 percent in August as the impact of an avian flu outbreak early this year continued to linger. Food prices slipped 0.1 percent in July. Wholesale chicken egg prices rose 23.2 percent last month after falling 24.2 percent in July.

The volatile trade services component, which mostly reflects profit margins at retailers and wholesalers, shot up 0.9 percent in August after rising 0.4 percent in the prior month. Almost half of the increase in August was attributed to a 7.0 percent surge in margins for apparel, footwear and accessories retailing.

A key measure of underlying producer price pressures that excludes food, energy and trade services edged up 0.1 percent in August after rising 0.2 percent in July.

The dollar's 17.5 percent rise against the currencies of the United States' main trading partners since June 2014 is restraining gains in the so-called core PPI.

Core PPI was up 0.7 percent in the 12 months through August. 

By Lucia Mutikani - Reuters (Editing by Paul Simao)