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UPDATE 1-ECB's Trichet rejects using core inflation

* No signs of commodity prices causing second-round effects

* Rejects use of core inflation as price pressure predictor

* Balancing public spending will not hurt growth

* Main danger is stopping economic reforms

(Adds quotes, background)

FRANKFURT, Jan 23 (Reuters) - The euro zone inflation rate, excluding volatile energy and food prices, does not gauge future price pressures well, European Central Bank President Jean-Claude Trichet was quoted as saying on Sunday.

In an interview with the Wall Street Journal, Trichet said that the greatest danger right now would be to stop the reform process that started during the financial crisis, and added austerity would strengthen, not kill the recovery process in the euro zone.

“In our case, we consider that core inflation is not necessarily a good predictor for future headline inflation,” Trichet told the newspaper, and added the central bank is ensuring higher energy prices do not seep into other prices.

“That being said, all central banks, in periods like this where you have inflationary threats that are coming from commodities, have to go through the hump and be very careful that there are no second-round effects. This is what we are doing.”

But he added that there are no signs of second-round effects on prices yet in the 17-country bloc.

“At this stage, we do not see this. And everybody knows we would not let second-round effects materialize,” he said.

Headline inflation in the euro zone jumped to 2.2 percent in December, the first time in more than two years that it topped the ECB’s target of below, but close to 2 percent.

However, core inflation has remained much lower at 1.1 percent in the same month and analysts expect it to rise slowly this year, indicating domestic price pressures in the euro zone are contained.

Some analysts have speculated that the ECB may look at core as much as headline inflation when setting monetary policy, speculation Trichet may have wanted to dispel.

ECB Executive Board member Lorenzo Bini Smaghi said last week that focusing on core inflation can give policymakers a “downwardly biased assessment of overall price pressures.” [ID:nLDE70J093]

Trichet also said euro zone policy interest rates, currently at a record-low level of 1.0 percent, are appropriate. The ECB kept rates on hold last week, but said the euro zone faces short-term price pressures -- taken by some in financial markets as a sign it could raise rates earlier than previously thought.

Asked about his hawkish tone in the news conference, Trichet said: “I have nothing to add to what I have said last Thursday.”

Trichet also said there was more work to be done to strengthen the global economic and financial systems.

“We could lose momentum in the reforms that are still urgently needed. That is the main danger,” he said.

Trichet also repeated his calls for stronger economic governance within the European Union and said those breaking common rules should face harsher penalties.

He urged euro zone governments to continue balancing their budgets and rejected the notion that the austerity drive could put an end to recovery. He said that, on the contrary, more balanced public spending creates confidence which fosters growth.

“I think that appropriate fiscal retrenchment in countries that need it is part of growth enhancement,” Trichet said.

“Sustainable public finances makes a difference in terms of improving confidence of households, enterprises, investors and savers, which is decisive to foster growth and job creation.” (Reporting by Sakari Suoninen; Editing by Diane Craft)

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