January 31, 2014 / 10:07 AM / 4 years ago

Euro zone inflation falls unexpectedly in January

* Inflation surprises with a drop in January to 0.7 pct
    * Unemployment stuck near record high in December
    * European Central Bank seen staying put until mid-2015

    By Martin Santa
    BRUSSELS, Jan 31 (Reuters) - Euro zone consumer prices
dropped in January, bucking market expectations for a rise,
mainly due to a sharp fall in energy costs and complicating the
European Central Bank's task of supporting the bloc's fragile
    Consumer prices in the 18 countries sharing the euro 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
in nearly four years.
    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
    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.
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