By Lucia Mutikani

WASHINGTON (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 even as hiring has cooled. 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. But the firming inflation trend, if sustained, could constrain the Fed's ability to ease monetary policy further.

"Concerns about too-low inflation appear misguided," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "The Fed will still cut rates next week to provide added insurance in the event that the trade war escalates, but it might think twice about moving again in October if core inflation shows any further spark."

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%, slowing from July's 1.8% advance.

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 trade war.