Euro zone inflation drops to near five-year low in July

BRUSSELS (Reuters) - Euro zone inflation fell in July to its lowest level since the height of the financial crisis nearly five years ago, data showed on Thursday, highlighting deflation risks on the European Central Bank's radar.

Consumer prices in the 18 countries sharing the euro rose by 0.4 percent on the year in July, the weakest annual rise since October 2009 when prices fell by 0.1 percent, the EU's statistics office Eurostat said.

Annual core inflation - which excludes energy, food, tobacco and alcohol costs - stood unchanged at 0.8 percent for the second month in a row.

Energy prices fell by 1.0 percent on the year in July, after a 0.1 percent rise in June, while prices of services were up by 1.3 percent for the second month running.

The ECB cut interest rates and announced a barrage of other measures in June to pump money into the sluggish euro zone economy, adding it stood ready to act again should inflation expectations deteriorate from the current outlook.

The bank holds a policy meeting on Thursday next week and analysts expected it to stay put, reflecting signals from the Governing Council that more time is needed to assess the impact of its latest measure on the real economy.

Euro zone inflation has been stuck in what the ECB calls a 'danger zone' of below 1 percent since October last year and is not expected to bounce back to the bank's target of close but below 2 percent even by 2016, when it should hit 1.4 percent.

Germany, Europe's largest economy, saw annual inflation easing in line with expectations to 0.8 percent in July from 1.0 percent, days after the ECB and the country's Bundesbank emphasized the need to raise wages in the euro zone's growth engine.

(Reporting by Martin Santa, editing by John Stonestreet)