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Euro zone inflation dips less than expected, core prices stubbornly high

FILE PHOTO: A shopper pays with a twenty Euro bank note at a local market in Nantes

FRANKFURT (Reuters) - Euro zone inflation dipped last month but underlying price growth remained stubbornly high, adding to the case for the European Central Bank to hold interest rates at record highs a bit longer before starting to ease policy towards mid-year.

Inflation across the 20-nation euro zone fell to 2.6% in February from 2.8% a month earlier, just shy of expectations for 2.5%, data from Eurostat, the EU's statistics agency showed.

But crucial core figures, which strip out volatile food and fuel prices, only declined to 3.1% from 3.3%, missing expectations for 2.9% and holding uncomfortably above the ECB's 2% target.

The ECB has kept its deposit rate at a record high 4% since September but talk of easing is now rampant and policymakers are now mostly debating the timeline for rate cuts and not whether a reversal is appropriate.

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The ECB jacked up rates in record quick time from mid-2022 after inflation spiked above 10% but price growth is now approaching its 2% target and policymakers have already said that new projections, due next Thursday, are likely to show a quicker return to target.

Still, the February data are unlikely to alleviate lingering concerns about underlying price pressures as inflation in the crucial, labour-intensive services sector eased only to 3.9% from 4.0%.

The ECB's key worry is that wage inflation is just too fast and unless workers start showing some restraint soon, prices could bounce back.

Wages are seen growing by more than 4.5% this year and the ECB has long held that anything above 3% is inconsistent with its own inflation target.

Six quarters of economic stagnation has shaken out the labour market a bit, easing wage pressures, but unemployment remains at a record low and labour costs could come under renewed pressure when growth resumes.

Indeed, fresh data from Eurostat on Friday showed unemployment holding steady at a record low 6.4% in January.

But the ECB also acknowledges that workers lost a large chunk of their real incomes to rapid inflation, so some catch up is warranted, as long as workers ease up on their demands when this process is done.

Markets now see around 90 basis points of rate cuts this year with the first move coming in June, a date that has been mentioned by a host of policymakers, too, as a reasonable start for rate cuts.

(Reporting by Balazs Koranyi; Editing by Toby Chopra)