WASHINGTON (Reuters) -The number of Americans filing new applications for unemployment benefits fell to a five-month low last week and consumer spending increased more than expected in September, showcasing the economy's strength heading into the final stretch of 2024 and just days before next Tuesday's presidential election.

Though prices pushed higher last month, inflation is firmly on a downward trend, with other data on Thursday showing labor costs posting their smallest gain in more than three years in the third quarter. The data likely keeps the Federal Reserve on track to cut interest rates next week and possibly in December.

Americans head to the polls to choose Democratic Vice President Kamala Harris or Republican former President Donald Trump as the country's next president. Polls show the race is a toss-up. Despite the economy's strong performance, high food and housing costs have caused angst among households.

"Consumers may say they're downbeat, but spending looks to be unfazed by a moderating labor market and still-high prices," said Shannon Grein, an economist at Wells Fargo.

Initial claims for state unemployment benefits dropped 12,000 to a seasonally adjusted 216,000 for the week ended Oct. 26, the lowest level since May, the Labor Department said.

The third straight weekly decline likely reflected the fading distortions from Hurricanes Helene and Milton, which boosted claims in early October and kept them elevated through the middle of the month. Applications were also lifted by a strike at Boeing, which has forced the planemaker to implement rolling furloughs, and hurt its suppliers.

Economists polled by Reuters had forecast 230,000 claims for the latest week. Unadjusted claims fell 3,349 to 200,132 last week, with filings declining 2,969 in North Carolina and dropping 2,692 in Florida. Applications also fell in California, helping to more than offset a 2,061 jump in claims in New York and a 1,854 increase in Michigan.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, decreased 26,000 to a seasonally adjusted 1.862 million during the week ending Oct. 19, the claims report showed.

Through the hurricanes and strike volatility, the labor market picture has probably not changed much. A report from global outplacement firm Challenger, Gray & Christmas on Thursday showed planned layoffs by U.S.-based employers dropped 23.7% to 55,597 in October.

The storms and labor strife, however, likely restrained job growth in October. The Labor Department reported last week that there were 41,400 workers on strike during the period that employers were surveyed for October's employment report, including at Boeing and three hotel chains.

Economists estimate that the drag on payrolls from Helene and Milton could be as much as 70,000.

A Reuters survey showed nonfarm payrolls probably increased by 113,000 jobs this month after rising by 254,000 in September. The unemployment rate is forecast unchanged at 4.1%.

The Labor Department is scheduled to publish October's employment report on Friday, the last major economic data before the election next week. Economists expected the U.S. central bank to brush aside the jobs report and cut rates by 25 basis points next Thursday. The Fed last month launched its policy easing cycle with an unusually large half-percentage-point interest rate cut, the first reduction in borrowing costs since 2020.

Fed's policy rate is now set in the 4.75%-5.00% range, having been hiked by 525 basis points in 2022 and 2023.

Stocks on Wall Street traded lower. The dollar was steady against a basket of currencies. U.S. Treasury yields rose.

INFLATION STILL EASING

Labor market resilience is combining with easing inflation, a rise in household net worth, thanks to a stock market boom and higher house prices, to support spending and the overall economy.

A separate report from the Commerce Department's Bureau of Economic Analysis showed consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.5% last month after an upwardly revised 0.3% gain in August.

Economists had forecast consumer spending climbing 0.4% after a previously reported 0.2% rise in August. When adjusted for inflation, spending increased 0.4%, putting consumption on a higher growth path heading into the fourth quarter.

The rise in spending was across goods and services, and was supported by a 0.3% gain in income as wages and salaries logged the second straight monthly increase of 0.5%. Some consumers tapped their savings, lowering the saving rate to a still-high 4.6% from 4.8% in August.

The data was included in Wednesday's advance gross domestic product report for the third quarter, which showed the economy growth at a 2.8% annualized rate after expanding at a 3.0% pace in the April-June quarter.

Though prices ticked up in September, the overall inflation picture remains benign amid subsiding wage pressures.

The personal consumption expenditures (PCE) price index rose 0.2% after an unrevised 0.1% gain in August. Prices were driven by services, which increased 0.3% amid higher costs for housing and utilities as well as healthcare and transportation. Goods prices fell 0.1%, declining for a second consecutive month.

In the 12 months through September, the PCE price index increased 2.1% - the smallest year-on-year rise in PCE inflation since February 2021 - after advancing 2.3% in August.

Excluding the volatile food and energy components, the PCE price index rose 0.3% after increasing 0.2% in August. In the 12 months through September, core inflation increased 2.7% for the third straight month. The U.S. central bank tracks the PCE price measures for its 2% inflation target.

"We are not concerned that inflation's progress toward the Fed's target is stalling, let alone reaccelerating," said Ryan Sweet, chief economist at Oxford Economics.

A third report from the Labor Department's Bureau of Labor Statistics showed the employment cost index (ECI), the broadest measure of labor costs, rose 0.8% in the third quarter. That was the smallest gain since the second quarter of 2021 and followed an unrevised 0.9% increase in the second quarter.

Labor costs gained 3.9% in the 12 months through September, the smallest rise since the third quarter of 2021, after advancing 4.1% in the year through June.

The ECI is viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.

"The further slowing of the ECI during summer is a reassuring sign that underlying conditions remain in place for the Fed to meet its inflation goals, despite recent firming of consumer prices," said Jonathan Millar, an economist at Barclays.