By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer prices moderated in May, but sustained increases in housing and healthcare costs kept underlying inflation supported, which could allow the Federal Reserve to raise interest rates this year.

While another report on Thursday showed an increase in the number of Americans applying for unemployment benefits last week, the trend remained consistent with a healthy labor market. The data came a day after the Fed downgraded its assessment of the jobs market and gave a mixed view of the economy.

The Labor Department said its Consumer Price Index increased 0.2 percent last month, slowing from April’s 0.4 percent rise. Gasoline prices rose modestly and the cost of food fell.

In the 12 months through May, the CPI gained 1.0 percent after advancing 1.1 percent in April.

Stripping out the volatile food and energy components, the so-called core CPI, increased 0.2 percent after a similar gain in April. That took the year-on-year core CPI rise to 2.2 percent from 2.1 percent in April.

Economists polled by Reuters had forecast the CPI gaining 0.3 percent last month and the core CPI rising 0.2 percent.

The Fed has a 2 percent inflation target and tracks an inflation measure which is currently at 1.6 percent. The U.S. central bank on Wednesday kept interest rates unchanged and said it expected inflation to remain below its target through 2017.

While the Fed signaled it still planned two rate hikes this year, there was less conviction, with six officials expecting only a single increase, up from one in March. The Fed raised its benchmark overnight interest rate in December for the first time in nearly a decade.

The dollar extended losses against the yen on the data, while prices for U.S. government debt were little changed.

FOOD PRICES FALL

Last month, gasoline prices rose 2.3 percent after surging 8.1 percent in April. Food prices fell 0.2 percent, reversing the prior month’s increase.

Within the core CPI basket, housing and medical costs maintained their upward trend. Owners’ equivalent rent of primary residence rose 0.3 percent after rising by the same margin in April.

Medical care costs increased 0.3 percent after a similar gain in April. The cost of hospital services shot up 0.7 percent after rising 0.3 percent the prior month. Doctor visit costs rose 1.0 percent, but the cost of prescription medicine fell 0.4 percent after increasing 0.7 percent in April.

Apparel prices rose 0.8 percent. The cost of used cars and trucks dropped 1.3 percent, the biggest fall since March 2009. Prices for new motor vehicles fell 0.1 percent.

In a second report, the Labor Department said initial claims for state unemployment benefits increased 13,000 to a seasonally adjusted 277,000 for the week ended June 11.

The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, slipped 250 to 269,250 last week.

Jobless claims have now been below 300,000, a threshold associated with a strong job market, for 67 straight weeks, the longest streak since 1973. The Fed said on Wednesday “the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.”

The U.S. central bank also noted that while the unemployment rate had declined, “job gains have diminished.”

But with job openings near record highs, both economists and Fed officials expect job growth to pick up after the economy added only 38,000 jobs in May, the smallest increase since September 2010.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)