UPDATE 2-Greek budget targets on track, recession pushes down prices
* Consumer prices fall 0.4 pct y/y in May
* Budget execution on track to meet targets
* Industrial output drops 1.8 pct
ATHENS, June 10 (Reuters) - Greece reported its budget deficit was on track to meet targets set by foreign lenders, whose inspectors arrived in Athens on Monday to measure progress under the country's bailout program. Athens more than halved its central government primary budget gap, which excludes local authorities, social security entities and interest payments, in the first five months of the year, as it chopped public spending and investment. Recession pushed consumer prices down for a third straight month in May, in a sign that an internal devaluation is gaining ground and potentially making the economy more competitive. However, data showed industrial output declined 1.8 percent in April. The central government primary gap shrank to 1.0 billion euros ($1.3 billion) - a quarter of an interim target of 4.2 billion - boosting the government's chances of achieving a surplus that would allow lenders to offer more debt relief under its EU/IMF bailout. "The country's fiscal picture has improved in the five-month period and reaching a primary budget surplus this year is attainable," Deputy Finance Minister Christos Staikouras told reporters. Chief inspectors from the "troika" of lenders - the European Union, International Monetary Fund and European Central Bank -were in Athens on Monday to continue a review of Greece's fiscal adjustment and agreed to reforms before paying out more aid. "We discussed reducing the value added tax on eateries, a draft bill on over-indebted households and reducing the public sector," a finance ministry official said. However, underlining the difficulties of raising funds through privatization, Greece failed to attract any binding bids for natural gas company DEPA, two Greek officials close to the sale said on Monday. With the economy shrinking at a 5.6 percent annual pace in the first quarter, consumer prices were pushed down for the third month in a row in May, providing some relief to household hit by the deep slump and wage cuts. Consumer prices fell 0.4 percent year-on-year in May, turning Greece's inflation differential versus the euro zone negative. Economists expect the trend to continue this year. "The slow adjustment of the price level to other trends in the economy continues," said economist Nikos Magginas at National Bank. Inflation in the 17 countries sharing the euro was 1.4 percent in May. Greek prices rose a cumulative 46 percent between 2001 and 2011, compared with 29 percent in the euro area as a whole. Now the economy is in its sixth year of recession and unemployment is nearly 27 percent. Some recovery is expected next year but the central bank expects a 4.6 percent contraction this year with consumer prices deflating an average 0.3 percent.