Eurozone inflation slows stoking expectations for ECB action Eurozone inflation fell significantly below market forecasts in January, stoking fresh fears of a Japanese-style bout of deflation and raising expectations of further action by the European Central Bank. Overall inflation across the 18-country single currency area slowed to 0.7 per cent in January, from 0.8 per cent the previous month, according to a flash estimate by Eurostat, the EU's statistical office. This was much lower than the 0.9 per cent market forecast from a Reuters poll. The slide will add to calls for the ECB, which has a 2 per cent inflation target, to take further action to reverse the downward pressure on prices. The central bank already cut its benchmark lending rate to a record low of 0.25 per cent in November in the face of falling inflation, but has not acted since. "We expect the ECB to take action to ease monetary policy, possibly as soon as next week's meeting," said Nick Kounis, economist at ABN Amro in Amsterdam. "Although we do not expect the region to fall into outright deflation, the eurozone is becoming increasingly vulnerable to such an outcome in case of a new unexpected demand shock," said Mr Kounis. While Mario Draghi, ECB president, last week signalled the central bank was open to buying packages of bank loans to households and companies if the eurozone entered deflationary territory, he stressed he did not think the eurozone was at risk of entering an extended period of falling prices. If the ECB chooses to act in the next few months, many economists believe a rate cut is more likely than quantitative easing. Jonathan Loynes, chief European economist at Capital Economics: "With Draghi recently sounding lukewarm on LTROs [cheap long-term loans to banks] and quantitative easing, another interest rate cut is perhaps the most likely move, if not next week then in March." The risk of deflation to the global economic recovery has captured the attention of many leading figures. Christine Lagarde, managing director of the International Monetary Fund, warned earlier this month that the eurozone is the most at threat to the "ogre" of deflation. The drop in inflation in January was mainly due to a sharp fall in energy prices, which contracted by 1.2 per cent from a month earlier. Core inflation, which excludes more volatile items such as energy costs, rose 0.8 per cent, from 0.7 per cent the previous month. "The ECB reacts a bit more to headline inflation than other central banks, giving January's dip more significance for its policy makers than if the same inflation report had been delivered for the US or UK," said Bill Adams, senior international economist for PNC Financial Services Group. While inflation has been slowing in the eurozone and to a less worrying extent in the US, Japan is in the midst of battling to pull the country out of around 15 years of falling prices with a massive dose of monetary stimulus that weakened the yen and helped push prices to 1.3 per cent last month, data from Tokyo on Friday showed. However, converse to the eurozone, it is energy costs that are pushing up prices in Japan, due to its increased reliance on imported fossil fuels following the Fukushima nuclear disaster. The eurozone's falling inflation came as unemployment remained stable but stubbornly high at 12 per cent in December. Due to what many executives describe as a fragile economic recovery, companies are holding back from hiring new workers. The December 2013 figures confirm that unemployment has stabilised in the EU labour market. But with 26.2m people out of a job in the EU, unemployment is still unacceptably high and more and more people find themselves at risk of poverty," said László Andor, European Commissioner for employment. The job crisis is far from over and efforts must continue at EU level and in member states to fight this scourge and ensure an inclusive and sustainable recovery.