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Eurozone inflation drops further below target

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PAN PYLAS | January 31, 2014 05:17 AM EST | AP

LONDON (AP) — Inflation across the countries that share the euro fell further below the European Central Bank's target in January, official figures showed Friday, in a development that may stoke speculation of another interest rate reduction.

Eurostat, the EU's statistics office, said inflation in the 18-country eurozone fell to 0.7 percent in the year to January from 0.8 percent the previous month. The consensus in the markets was for a rise to 0.9 percent.

The fall is likely to trigger speculation that the eurozone is about to suffer a debilitating bout of deflation — falling prices can hurt an economy as consumers delay purchases in the hope of getting bargains down the line and businesses postpone investment.

The ECB meets Thursday for its monthly policy meeting and a number of economists think that it may ease monetary policy further in order to prevent a slide into deflation. The ECB's mandate is to keep a lid on inflation and it has set a target of keeping price increases just below 2 percent.

Some economists say it may cut its main interest rate from its current record low of 0.25 percent to 0.10 percent. Others think it may decide to make its deposit rate negative, a move that would essentially make banks pay to have their money parked at the central bank. That, the theory goes, may make them lend more, which would shore up economic activity and stimulate inflation pressures.

Separately, in a positive development, Eurostat said eurozone unemployment fell by 129,000 in December. That's the biggest fall since April 2007 and was largely due to an 81,000 fall in Spain.

The overall unemployment rate, however, was unchanged at 12 percent.