BRUSSELS The cost of living in the euro zone rose more than expected in December but remained benign enough to allow a possible cut in interest rates in 2013 to support the bloc's feeble economy.
Annual consumer inflation in the 17 countries sharing the euro was 2.2 percent in December, the same level as in November, the EU's statistics office Eurostat said on Friday, bucking expectations of a fall to 2.1 percent in a Reuters poll of economists.
The price increases were most marked in food and services, which together make up 60 percent of Eurostat's index, despite a cooling in the rate of energy price rises.
Food and services inflation suggests households spent a little more freely during the holiday season after months of holding back as families and businesses struggle through Europe's worst economic and banking crisis in a generation.
In Germany, Europe's biggest economy, separate data showed consumer prices in six states climbing much more than expected in December. Germany's private sector expanded for the first time in eight months in December.
"Travel, hotel and restaurant prices have picked up and this year the rise was a little sharper than on average in past years," said Ulrike Rondorf, an economist at Commerzbank.
European companies and policymakers alike are anxious for any signs of a recovery in the euro zone's economy, which is expected to contract in 2013 while the rest of the world's big economies grow.
One leading business survey suggested on Friday that the euro zone may have passed the worst of its downturn, although a return to the economic growth needed to address record unemployment levels is still far off.
In the short term, many economists expect the European Central Bank to cut its main lending rate to below 0.75 percent early in 2013 to try to revive the economy, although with the cost of borrowing already so low, it may not have much impact.
Economist see the bank having room to do so because falling world energy prices and Europeans' reluctance to spend mean inflation is likely to fall below the European Central Bank's target of close to, but not above, 2 percent during 2013.
The December and November 2012 readings are already the lowest since December 2010.
"We expect downward momentum in core (consumer) prices to bring down the headline (inflation level) to 1.8 percent this year," said Francois Cabau at Barclays Capital.
The ECB's Governing Council meets on January 10, with policymakers appearing unwilling to countenance a rate cut so early in the year. ECB President Mario Draghi said there had been a discussion about rates at its last meeting in December, however, which fuelled expectations of a cut to 0.50 percent.
(Reporting by Robin Emmott; Editing by Rex Merrifield and Catherine Evans)