Spain inflation slows in January from month earlier

MADRID (Reuters) - A slow return to economic growth, weak domestic demand and relatively small rises in fuel costs left Spanish inflation close to flat in January, official data showed on Friday, feeding fears of deflation in the region.

Spanish national consumer prices rose 0.2 percent year on year, down slightly from December's 0.3 percent increase and its lowest January rise since records began in 1961. European-Union harmonised prices rose 0.3 percent from a year earlier.

Inflation in the euro zone's fourth largest economy has been at or below 0.3 percent since September, reflecting similarly weak price rises across the euro zone, which last measured an annual rate of 0.7 percent. That is well below the European Central Bank's inflation target of below, but close to, 2 percent.

The risk of the euro zone sliding into an economically and financially damaging spiral of deflation, similar to Japan's 20-year experience from the mid-1990s, is worrying a growing number of leading economists.

Spain emerged from a two-year recession in the second half of last year, though any return to growth is expected to be slow as the economy absorbs millions of workers left jobless by a downturn which began almost six years ago.

The ECB has played down the possibility of deflation in the 18-member bloc, but 22 of 46 economists, polled February 7-13 by Reuters, rated the risk as "somewhat serious" and eight said it was "serious.

The ECB last week kept interest rates on hold at a record low 0.25 percent and refrained from introducing any other policy measure such as more cheap lending to banks.

Not all economists fear Spain is at risk of a deflationary cycle, pointing to the economic turnaround and the potential slowdown in wage cuts as companies begin to hire again.

"I'm concerned about some countries where wage adjustment has not taken place, but in Spain I think this is behind us to a large extent," said economist at Deutsche Bank Gilles Moec.

(Reporting by Paul Day; Editing by Ruth Pitchford)