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Euro zone January inflation slips

Euro zone inflation was lower than estimated in January, data showed on Wednesday, supporting market expectations that price growth will continue slowing as the economy contracts and possibly paving the way for an ECB rate cut later this year.

The European Union's statistics office Eurostat said consumer prices in the 17 countries using the euro fell 0.8 percent in January against December for a year-on-year rise of 2.6 percent - a downward revision from the first estimate of 2.7 percent published on February 1.

But oil prices that hit record highs in euro terms this month could slow inflation's downward trend in the coming months, even as the 17-nation bloc heads into recession, making an immediate interest rate cut less likely.

"We don't expect an ECB rate cut in March," said Fabio Fois, an economist at Barclays Capital. "I think the ECB sees that the interest rate level is about right, with energy price pressures still present in terms of higher oil prices."

The European Central Bank (ECB) aims to keep inflation below, but close to 2 percent over the medium term. Some economists believe the bank may consider cutting interest rates from the current 1 percent to support the flagging economy, but the oil price will play a central role in consumer price trends.

The ECB's move on Wednesday to pump 530 billion euros ($711 billion) into the euro zone's troubled financial system for the second time in as many months could also mean a period of calm in terms of policy.

"The ECB seems likely to remain firmly in 'wait-and-see' mode for some time," said Howard Archer, chief European economist at IHS Global Insight, though he added that rates could eventually go to 0.75 percent if economic growth remains weak.

The European Commission expects the euro zone's economic output to shrink 0.3 percent in 2012, the second recession in just three years for the currency area. Economists polled by Reuters see a return to growth in 2013.

HIGHER ENERGY COSTS

The monthly price fall was mainly due to seasonal reductions in the prices of clothes and package holidays, Eurostat said.

In year-on-year terms, the inflation rate was underpinned mainly by high prices of fuel, which added 0.33 percentage points to the final figure, followed 0.14 percentage points from heating oil and another 0.14 points from gas.

Overall energy prices, boosted by tensions over oil-producer Iran's nuclear program, jumped 2.6 percent in January against December for a 9.2 percent year-on-year increase.

Concerns about supply disruptions resulting from any possible military confrontation between Iran and the West have pushed up prices and Brent crude oil gained over $1 on Wednesday to around $123 a barrel, up 10.5 percent this month.

Without the volatile energy prices, inflation was already at the ECB target, having fallen 1.2 percent on the month for a 1.9 percent year-on-year reading.

Core inflation, which excludes energy and unprocessed food prices, fell 1.4 percent on the month and was 1.9 percent year-on-year, down from 2.0 percent in December.

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