UPDATE 2-Argentina posts lower-than-expected 1.3 pct inflation in January

(Adds details from report, background on price hikes, salary negotiations)

BUENOS AIRES, Feb 9 (Reuters) - Consumer prices in greater Buenos Aires rose 1.3 percent in January over the previous month, Argentina’s official Indec statistics agency said on Thursday, far below market expectations and in line with the central bank’s annual target.

January’s reading was slightly above 1.2 percent inflation in December, but below a median expectation for a 1.7 percent rise in consumer prices in a Reuters poll.

The central bank is targeting inflation between 12 percent and 17 percent for 2017. It has kept interest rates steady for the past 10 weeks, noting that consumer prices had shown “mixed signals” in January.

Private economists see 2017 inflation somewhat higher, at above 20 percent, and say 2016 inflation totaled around 40 percent.

Argentina does not publish countrywide inflation data, but consumer prices for the greater Buenos Aires area are used as a proxy. President Mauricio Macri revamped Indec after taking office in late 2016 due to widespread allegations of data manipulation by the previous administration. Indec resumed publishing inflation data in June.

January inflation was driven by an increase in transportation costs, after the government increased regulated gasoline prices early in the month, as well as an increase in recreation prices in the peak summer tourist season. Food and drink prices also rose 1.6 percent.

That was outweighed by a 2.2 percent drop in clothing prices and modest increases in other categories.

The central bank has noted that regulated prices, such as gasoline and electricity, are likely to increase by more than the core basket. Core inflation was also 1.3 percent in January, the lowest level since Indec resumed publishing inflation data.

Last week, the government announced a reduction in domestic electricity subsidies as part of its efforts to trim the fiscal deficit. The resulting price hikes of between 60 percent and 90 percent for most Buenos Aires-area consumers are expected to contribute to inflation in February and March.

The reading comes ahead of key annual salary negotiations between unions and employers, in which inflation expectations are a crucial factor in determining the level of pay raises. (Reporting by Luc Cohen; Editing by Lisa Shumaker and Jonathan Oatis)