By Jan Strupczewski
BRUSSELS (Reuters) - Euro zone inflation slowed further in September on falling prices of unprocessed food and energy, a first estimate showed on Tuesday, sending the euro lower against the dollar on expectations of further European Central Bank policy easing.
Eurostat said consumer prices in the 18 countries sharing the euro rose 0.3 percent year-on-year, slowing from 0.4 percent year-on-year increases in August and July. The September was in line with market expectations, according to polling data.
The ECB wants to keep headline inflation below, but close to, 2 percent over the medium term. The persistently low rate underscores the difficulty of hitting that target in a stagnating euro zone economy.
By 1025 GMT (11.25 a.m. BST), the euro had fallen against the dollar to 1.2609 from 1.2662 before the release. The FTSE Eurofirst 300 share index of leading companies (FTEU3) was up 0.56 percent at 1,378.81.
"With actual output below potential and weak wage growth in many euro zone countries, inflation will remain subdued," said Tomas Holinka, economist at Moody's Analytics.
"The euro area economy stalled in the second quarter and the recovery prospects are fading. With tougher sanctions against Russia, risks are weighted to the downside. The euro zone's weaker than expected performance fuels uncertainty about economic recovery and fears about the threat of deflation," he said.
Unprocessed food prices fell 0.9 percent year-on-year in September and energy was 2.4 percent cheaper.
What the European Central Bank calls core inflation - a measure stripping out these two volatile components - was 0.7 percent year-on-year, slowing down from 0.9 percent in August.
To accelerate price growth, the ECB has cut the cost of borrowing to almost zero and pledged further cheap loans to banks and to buy repackaged debt. ECB President Mario Draghi has emphasised that it could do even more.
But going for full-blown quantitative easing, by adding government bonds to the ECB's shopping list, would be politically difficult because of stiff opposition in Germany.
Draghi is expected to give further details of ECB plans to buy reparcelled debt, known as asset-backed securities, when the bank's governing council meets in Naples on Thursday. Investors do not expect new policy decisions yet, after the bank cut all three of its main interest rates in early September.
Draghi has, in the meantime, sought to put the ball back in the court of governments, saying that the central bank cannot single-handedly turn around the bloc's economy, and countries need to make reforms.
The ECB's job may be made easier by a weakening euro, which has broken below its 2013 lows and is down almost 9 percent from the peak it hit against the dollar in May.
(Additional reporting by John O'Donnell in Frankfurt; Editing by Alastair Macdonald and Mark Trevelyan)