UPDATE 1-Low-rated euro zone yields drop as low inflation sets stage for Draghi


* Italian, Portuguese yields drop after euro zone inflation falls

* Consumer price data could add to debate ahead of ECB meeting

* Kaplan speech could hint at Fed direction amid Trump troubles

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Writes through)

LONDON, May 31 (Reuters) - South European government bond yields fell on Wednesday after inflation data for the euro zone dropped well below the European Central Bank target ahead of a meeting of policymakers next week.

Inflation in the single currency bloc fell below expectations to 1.4 percent in May, according to early estimates, well below the ECB's target of just below 2 percent and compared to 1.9 percent in April.

This supports the widespread view - one put forward by ECB President Mario Draghi on Monday - that the central bank should keep its current ultra loose monetary policy stance in place.

The yields on government debt from Italy and Portugal, countries seen benefiting the most from ECB stimulus, dropped 2-3 basis points on Wednesday, outperforming the rest of the euro zone market.

High-grade euro zone government bond yields were flat to a touch lower.

"The inflation numbers haven't been superb, but the overall bigger picture is that we've moved away from the deflation risk and we are moving steadily towards the ECB target," said ING strategist Padhraic Garvey.

"Also, the core inflation rate has been fairly steady around 1 percent."

Inflation excluding energy and unprocessed food - known in markets as core inflation because it strips out the effect of factors such as oil prices - was at 1 percent compared to 1.2 percent in April.

High-grade euro zone bond yields have dropped in recent days on below-forecast inflation numbers from Germany and Spain.

Draghi said on Monday that even though risks to euro zone growth have declined, he was convinced that an extraordinary amount of monetary policy support was still necessary.

Germany's 10-year government bond yield, the benchmark for the region, gave up early rises on speculation the inflation number could overshoot expectations, and was flat at just above 0.29 percent.

The gap between Italian and German 10-year yields came off four-week highs hit on Tuesday, and was at 186 bps.

Inflation numbers are under particular scrutiny ahead of a ECB meeting next week.

Policymakers are divided on the issue - and are set to take a more benign view of the economy when they meet on June 8 and will even discuss dropping some of their pledges to ramp up stimulus if needed, four sources with direct knowledge of the discussions told Reuters.

Later on Wednesday, investors will turn attention to another central bank, with U.S. Federal Reserve member Robert Kaplan due to speak in New York.

"The key question is whether the political turbulence in the U.S. has any impact on monetary policy," said DZ Bank strategist Daniel Lenz.

The White House said on Tuesday that U.S. President Donald Trump's communications director is leaving the job as Trump tries to contain political damage from investigations into Russia and his presidential campaign.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Reporting by Abhinav Ramnarayan; Editing by Andrew Heavens)