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Deflation worries back as euro zone inflation falls again

Inflation in the euro zone fell more than expected in January to the level at which the European Central Bank last cut interest rates, as unemployment in the region remained stuck at 12 percent.

Consumer prices rose by 0.7 percent year-on-year in January, according to official statistics released by Eurostat – significantly below the 0.9 percent increase expected by economists.

Onur Coban | Anadolu Agency | Getty Images

(Read more: Euro zone money supply dries up, pressuring Draghi)

The figures are likely to give rise to more deflationary concerns, which were ignited when October's data showed inflation had fallen to a 47-month low of 0.7 percent. The concerns were not helped by December's lower-than-expected inflation figure of 0.8 percent.

Economists said the figures would up the pressure on the European Central Bank (ECB), which is due to will make its next monetary policy decision on Thursday, February 6. October's surprisingly low figures spurred the bank to cut its main interest rate to 0.25 percent from 0.5 percent.

"The latest euro zone unemployment and inflation data maintain the pressure on the ECB to do more to ward off deflation risks, perhaps as soon as next week," Capital Economics' Chief European Economist Jonathan Loynes said in a note.

"With the strong euro adding to deflation risks, the pressure on ECB President Mario Draghi to follow up his recent dovish words with further policy action is very strong."

While Howard Archer, chief European economist at IHS Global Insight, described the data as "worrying news for the ECB."

"While the ECB remains adamant that overall deflation is unlikely in the euro zone, it will be extremely uncomfortable with consumer price inflation coming back down to 0.7 percent," he said in a note.

As such, it looked increasingly possible that the bank would trim its refinancing rate to 0.10-0.15 percent, Archer added.

(Read more: Too soon to declare euro zone victory: Draghi)


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