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Euro zone inflation slides, fueling deflation fears

Euro zone inflation fell to a 52-month low in March, increasing the pressure on the European Central Bank (ECB) to act and ward off the risk of deflation at this Thursday's monetary policy meeting.

Consumer prices rose by 0.5 percent year-on-year in March, according to official statistics released by Eurostat Monday, as core inflation fell to 0.8 percent from 1 percent. The consumer price figure marked the lowest level since November 2009, and was below the 0.6 percent expected by analysts.

The euro fell against the dollar immediately after the data were published, but reversed gains soon after and by 11:00 a.m. London time was 0.25 percent higher. The FTSEurofirst, meanwhile, extended gains.

Howard Archer, chief euro zone economist at IHS Global Insight, described the news as "uncomfortable and unwelcome" for the ECB.

Read MoreECB to get drastic? QE could be on the table

"We had been increasingly leaning towards the view that the ECB is done on stimulative action, but the further dip in euro zone consumer price inflation to just 0.5 percent in March ramps up the pressure on the ECB to act," he said in a note, highlighting too that the euro had recently strengthened to a 30-month high and that lending to businesses had continued to fall in February.

One result of deflation is to push down demand, as people hold off purchases in the hope of more price declines. It can also cause increased unemployment and even lead to economic depression.

Ben May, European economist at Capital Economics, stressed that the slide in inflation may reflect temporary factors relating to the timing of Easter, but added: "the weakness of inflation suggests that the ECB may need to take further policy action."

Sean Gallup | Getty Images

Deflation fears

Fears that the euro zone was sliding towards deflation were ignited in October when data showed inflation had fallen to a 47-month low of 0.7 percent - significantly lower than the ECB's target of just below 2 percent. The central bank cut interest rates at its November meeting to a record low of 0.25 percent in response.

Price growth, however, has continued to disappoint and remained well below the ECB's target level of just under 2 percent. This has led to increasing calls for the ECB to boost the region's economy - and the latest inflation data is likely to heighten expectations of some action from the central bank on Thursday.

Read MoreDeflation fears: Will the ECB pull the trigger again?

The International Monetary Fund (IMF) said on Monday that the ECB still had room to cut interest rates.

"We are not so much worried about deflation by itself, but we are very worried about what we call 'low-flation'," Reza Moghadam, director of the IMF's European Department, said at London's City Week conference, according to Reuters.

"There is more room for further (ECB) easing, not least because inflation is under control."

Unconventional measures?

The data follow a slew of comments by ECB Governing Council members over the past few days, with a number warning of deflationary risks and saying the ECB would take decisive action if necessary.

Meanwhile, Bundesbank President Jens Weidmann joined ECB President Mario Draghi in insisting the euro zone was not in a deflationary cycle, and there were no signs consumers were putting off purchases in anticipation of prices falling further.

Read MoreIMF calls for ECB action: What are Draghi's options?

Weidmann also stoked interest by telling newswire MNI that an asset-purchase, or quantitative-easing (QE), program had not been ruled out - in what would be something of a drastic change in policy.

He said the central bank should consider different monetary policy tools, and could look at buying up euro zone government bonds or top-rated private sector assets.

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