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updated: 1/7/2014 7:40 AM

Eurozone inflation dips further below target

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Associated Press

LONDON -- Inflation across the eurozone dipped further below target in December, official figures showed Tuesday, in a development that may ratchet up the pressure on the European Central Bank to ease monetary policy in coming months.

Eurostat, the EU's statistics office, said inflation across the 17 EU countries that used the euro in December fell to 0.8 percent from 0.9 percent the month before. The ECB is tasked with setting monetary policy to keep price inflation just below 2 percent.

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Despite its drop, inflation is still above the 0.7 percent recorded in October, which prompted the ECB to cut its main interest rate to a record low of 0.25 percent.

Perhaps the most notable aspect of Tuesday's figures was that the core rate, which excludes energy, food, alcohol and tobacco, fell to an all-time low of 0.7 percent. That will raise concerns that the eurozone may face a period of deflation, a protracted fall in prices that kills off consumer spending and business investment.

An outright fall in prices remains a possibility, partly because wage increases are muted due to high unemployment. The relatively high value of the euro, meanwhile, has made imports cheaper.

Some countries, notably Greece, are already seeing falling prices, a development that may make its debt servicing even more difficult.

Most economists think the ECB will keep its monetary policy unchanged at its meeting Thursday. However, they also think that ECB President Mario Draghi will leave the door open to a further loosening of policy in his ensuing press conference given the low inflation and growth backdrop.

"While the ECB may refrain from providing additional policy support on Thursday, we expect further action in the months ahead," said Ben May, European economist at Capital Economics.

A number of measures have been mooted to get growth rates higher and prevent prices from falling:

-- Though the ECB has little room to cut its benchmark rate further, some economists predict it could reduce it to 0.10 percent.

-- The ECB could make banks pay to keep deposits at the central bank by cutting the so-called deposit rate to negative, encouraging banks to lend more to businesses and homeowners.

-- The ECB could offer another round of long-term, cheap loans to banks, again in the hope of getting them to lend more.

The eurozone grew to 18 member states at the start of 2014 following Latvia's adoption of the currency.

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