Economists had forecast the CPI rising 0.2% in July and climbing 1.8% year-on-year.
Mattis said North Korea must stop isolating itself and "stand down" in its pursuit of nuclear weapons, and Pyongyang "should cease any consideration of actions that would lead to the end of its regime and the destruction of its people".
Investor focus now turns to Friday's U.S. consumer price index data.
On the economic front, data is expected to show that USA consumer prices likely rose in July after being unchanged the prior month.
The S&P 500 index was on track for its first daily drop of more than 1 percent in nearly three months on Thursday as investors grew cautious over escalating tensions between the United States and North Korea.
European markets also slid in early trade after Wall Street indices suffered their biggest losses in almost three months Thursday, while the dollar struggled to recover from eight-week lows below 109 yen as investors fled to safe haven assets.
The North Korea situation isn't the only thing weighing on stocks.
In overseas trading, stock markets across the Asia-Pacific region saw continued weakness during trading on Friday.
So far it's just been a war of words between the USA and North Korea so the rally has just been a normal reaction to the possibility of a geopolitical event.
In currency markets, the dollar dropped as low as 109.74 yen, its lowest in about two months, from 110.39 yen in NY and the upper half of the 110-yen range in Tokyo earlier Tuesday.
"Heightened geopolitical risks overnight have seen the markets flip from risk-on to risk-off and we have to wait and see how long this move runs before adding some positions", said Viraj Patel, an FX strategist at ING in London.
Overall, earnings growth for MSCI Europe companies was tracking 24 percent, Thomson Reuters data showed, while MSCI Euro zone companies were seeing 16 percent earnings growth for the second quarter.
The dollar was down 0.53% against the yen at 109.48 yen, after briefly dropping as low as 109.53.
Against the dollar, the franc surged 0.6 percent to 0.9688 francs, reversing a two-week losing streak.
Financial stocks underperformed after U.S. Treasury yields fell as bond prices rose in a flight to safety by nervous investors.
Crude oil prices fell on Thursday, on concerns of lingering global oversupply as Russian Federation considered a future output resumption and OPEC boosted its July production numbers.