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Deflation fears return as euro zone inflation slips

Euro zone consumer inflation came in lower than expected in December, adding to concerns that the euro zone could be heading towards a period of deflation.

Consumer prices rose by 0.8 percent year-on-year in December, below the 0.9 percent expected by economists. It comes after inflation increased by 0.9 percent in November.

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The data is unlikely to allay deflationary concerns which were ignited when October's figures showed the rate of inflation had fallen to a 47-month low of 0.7 percent.

(Read more: Euro zone economic recovery gathers steam)

The figures for the 18-country currency bloc are closely watched by the European Central Bank (ECB), which cut its main interest rate to 0.25 percent from 0.5 percent following October's surprisingly-low inflation data.

The euro hit a session high on the news on Tuesday. It rose to $1.3647 from $.13614 on anticipation that the central bank might do more to support the economy.

The bank's Governing Council will announce its latest policy decision on Thursday, and although it is not expected to deploy any of its "powerful artillery" this month, the most recent inflation figures could lead to calls for more stimulus in 2014.

Inflation remains well below the bank's 2 percent target, leaving the door open for more monetary easing by ECB President Mario Draghi in the short-term.

Ishaq Siddiqi, market strategist at ETX Capital, said the data meant "deflation fears are back on board."

"Draghi and Co are likely to face more pressure to act with stimulus measures to tackle deflation," he said in a note. "If inflation keeps edging lower, the likelihood of another cut to the refi rate or even negative deposit rates seem to be more pronounced than before."

(Read more: ECB unlikely to deploy its artillery, but pressure grows)

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