By Robin Emmott
BRUSSELS (Reuters) - The euro zone's Christmas shopping season was a sore disappointment as demand for retail goods fell sharply, adding to the risk of deflation for the currency bloc.
Retail sales in the 17 countries sharing the euro fell 1 percent in December compared to the same month a year ago, the EU's statistics office Eurostat said on Wednesday. Economists polled by Reuters had expected a 1.5 percent increase.
Compared to November, December's figures were also worse than expected, showing a 1.6 percent month-on-month fall when economists had forecast just a 0.5 percent dip.
Despite signs of a recovery, the sinking demand for consumer goods follows a surprise fall in euro zone inflation in January to 0.7 percent, far below the European Central Bank's target of just under 2 percent and near four-year lows.
Expectations are growing among economists for more ECB action, including a possible rate cut to zero when the Governing Council meets on Thursday.
"A weakness in domestic demand doesn't help the picture on prices. Even if we do see some modest growth in the economy, that doesn't mean that inflation risks are immediately disappearing," said Giada Giani, an economist at Citigroup.
Reacting to the data, the euro fell 15 basis points against the dollar to 1.3503.
Consumers are the weak link in the euro zone's rebound from its worst ever recession, reluctant to spend at a time of near record unemployment and that could prompt shops to lower prices to entice people back to the high street.
That risks a viscous cycle where households continue to hold back for bargains, forcing businesses to lower prices even more and increasing the chances of deflation.
The contrasting fortunes in the economy was evident in surveys of the euro zone's private sector, which posted its busiest month in 2-1/2 years in January.
Beyond cutting interest rates, the ECB has a range of other policy options it could use to tackle a deflation risk, including offering banks another batch of long-term loans or a U.S.-style asset buying programme.
However, the euro zone is still far from Japan's deflationary spiral of the 1990s and, as ECB policymakers focus on the medium-term outlook rather than price swings, some economists see no need to act.
"Some expect a move on rates, some expect a move on liquidity and some expect no move at all, including us," said Greg Fuzesi at JP Morgan. "It is a very close call, but we would emphasize that the debate centres on options that would have only a modest impact on the economy."
Still, for consumers the sinking sales of goods across the euro zone ranging from food to medical supplies reflects the hangover from the bloc's debt and banking crisis.
Even spending on food and drink was lower this past Christmas than it was in 2012, a sign that families may have used up much of their savings that saw them through the crisis.
Internet shopping continues to rise as people seek bargains online, while spending fell across the board, including on fuel.
(Reporting by Robin Emmott; Editing by Toby Chopra)