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* Consumer price index gains 0.1% in August
* CPI increases 1.7% year-on-year
* Core CPI rises 0.3%; up 2.4% year-on-year
* Weekly jobless claims fall 15,000 to 204,000
WASHINGTON, Sept 12 (Reuters) - U.S. underlying consumer prices increased solidly in August, leading to the largest annual gain in a year, but rising inflation is unlikely to deter the Federal Reserve from cutting interest rates again next week to support a slowing economy.
Other data on Thursday showed the number of Americans filing applications for unemployment benefits dropped to a five-month low last week suggesting the labor market remains healthy, which should continue to underpin consumer spending.
The longest economic expansion on record is under threat from the White House's year-long trade war with China. Fed Chair Jerome Powell said last week he was not forecasting or expecting a recession, but reiterated the U.S. central bank would continue to act "as appropriate" to keep the expansion now in its 11th year on track.
The Labor Department said its consumer price index excluding the volatile food and energy components gained 0.3% for a third straight month. The so-called core CPI was boosted by a surge in healthcare costs and increases in prices for airline tickets, recreation and used cars and trucks.
In the 12 months through August, the core CPI increased 2.4%, the most since July 2018, after climbing 2.2% in July.
Economists polled by Reuters had forecast the core CPI rising 0.2% in August and up 2.3% on a year-on-year basis.
But a decline in energy prices held back the increase in the overall CPI to 0.1% last month. The CPI gained 0.3% in July. In the 12 months through August, the CPI increased 1.7% after advancing 1.8% in July.
The Fed, which has a 2% inflation target, tracks the core personal consumption expenditures (PCE) price index for monetary policy. The core PCE price index rose 1.6% on a year-on-year basis in July and has fallen short of the central bank's target this year.
Economists expect inflation will accelerate in the coming months and breach the Fed's target in 2020 following the broadening this month of U.S. tariffs on Chinese goods to include a range of consumer goods. Still, the Fed is likely to continue cutting interest rates this year to offset the drag on the economy from the U.S.-China trade war.
The trade stand-off has soured business confidence and tipped both U.S. and global manufacturing into recession.
Treasury Secretary Steven Mnuchin said on Thursday President Donald Trump was prepared to keep or even raise tariffs on Chinese imports amid ongoing trade talks. Mnuchin's comments came despite Washington and Beijing granting concessions ahead of the next round of negotiations.
The dollar was little changed against a basket of currencies after the inflation data, while U.S. Treasury yields rose. U.S. stock index futures were trading slightly higher.
GASOLINE PRICES FALL
The U.S. Treasury yield curve has inverted, flagging a recession. Financial markets have fully priced in a rate cut at the Fed's Sept. 17-18 policy meeting. Most economists expect additional monetary policy easing in October and December.
The Fed cut rates in July for the first time since 2008.
In August, gasoline prices fell 3.5% after rebounding 2.5% in July. Food prices were unchanged for the third straight month. Food consumed at home fell 0.2%.
Owners' equivalent rent of primary residence, which is what a homeowner would pay to rent or receive from renting a home, rose 0.2% in August for a second consecutive month.
Healthcare costs jumped 0.7% in August, the largest gain since August 2016, after rising 0.5% in July. They were driven by a 1.4% surge in the prices of hospital services. That was also the biggest increase since August 2016.
There was also a jump in the costs of nonprescription drugs last month, but prices for prescription medication fell 0.2%.
Apparel prices rose 0.2% after gaining 0.4% in the prior month. The government early this year introduced a new method and data to calculate the cost of apparel.
Used motor vehicles and trucks prices increased 1.1% in August. They have now increased for three straight months. Prices for new motor vehicles dipped 0.1%. Prices for recreation increased 0.5%, the most since December 2018.
The cost of household furnishings and operations fell after rising for two consecutive months.
In another report on Thursday, the Labor Department said initial claims for state unemployment benefits declined 15,000 to a seasonally adjusted 204,000 for the week ended Sept. 7, the lowest level since April. The drop in claims was the largest since May. Economists polled by Reuters had forecast claims slipping to 215,00 in the latest week.
(Reporting By Lucia Mutikani; Editing by Andrea Ricci)