CORRECTED-UPDATE 1-Euro zone inflation drop in January gives ECB fresh headache

Fri Jan 31, 2014 6:24am EST

Related Topics

* Inflation surprises with a drop in January to 0.7 pct
    * Euro falls to 10-day low against the dollar
    * Inflation data seen as trigger for further easing
    * ECB, for now, seen staying put until mid-2015

 (Corrects 1st, 2nd paragraph to show inflation fell, not
prices)
    By Martin Santa
    BRUSSELS, Jan 31 (Reuters) - Euro zone consumer price
inflation dropped in January, bucking market expectations for a
rise and providing a possible trigger for further easing by the
European Central Bank to sustain a fragile recovery and ward
against deflation.
    Consumer price inflation in the 18-country bloc fell to 0.7
percent year-on-year in the first month of 2014, down from 0.8
percent in December, data from the EU's statistics office
Eurostat showed on Friday.
    Inflation last touched the 0.7 percent level in October,
which was the lowest inflation reading for the single currency
area in nearly four years.
    The euro, reacting to the data, fell to a 10-day low of
$1.35175 from around $1.3540. It fell more sharply against the
yen, dropping to a two-month low of 138.53 yen, down
from 138.88.
    "The ECB's sensitivity to inflation data was already high
and even a small surprise like this one today might tip the
balance towards more easing," said Frederik Ducrozet, a senior
euro zone economist at Credit Agricole. 
    "I would not expect action next week, rather a stronger
wording for a possible cut later, possibly in March," he added,
referring to the ECB's Feb. 6 meeting.
    Economists polled by Reuters expected consumer price
inflation to accelerate slightly to 0.9 percent in January, a
level that is still well below the ECB's target of close to but
below 2 percent.
    The drop in January was prompted by a 1.2 percent fall in
the highly volatile price of energy, which was flat in the
previous month. The cost of food, alcohol and tobacco products
were up by 1.7 percent on the year.
    Although ECB President Mario Draghi said in January
deflation was not threatening the euro zone, a number of
countries are already suffering deflation and the International
Monetary Fund warned deflation was a potential risk.
    The ECB, which cut its key interest rate to a record low of
0.25 percent in November, is expected to stay put until mid-2015
unless money market rates rise and the euro strengthens.
    In Germany, Europe's largest economy, consumer prices fell
by 0.7 percent on the month, keeping the annual inflation rate
steady at 1.2 percent, with both figures coming below
expectations. 
    A separate Eurostat data release showed on Friday that the
unemployment rate in the euro zone was stuck near a record high
at 12 percent for the third month running. It is widely expected
to ease only very modestly in the coming quarters.
    Some 19 million people are out of work in the euro zone,
slowing the uneven recovery as Europeans remains cautious and
thrifty, proving only a limited boost to economic growth.
    "The job crisis is far from over and efforts must continue
at EU level and in member states to fight this scourge and
ensure an inclusive and sustainable recovery," EU Employment
Commission Laszlo Andor said in a statement.  
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For January inflation TABLE   see:            
For January jobless TABLE     see:            
For jobless GRAPHICS see      link.reuters.com/kes74s
For youth jobless GRAPHICS    link.reuters.com/dej74s
For flash inflation pls see   link.reuters.com/kuj24s
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 (editing by Robin Emmott/Jeremy Gaunt)
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