Euro zone inflation eased to 1.9 per cent in July from 2 per cent in June as consumer prices posted their biggest monthly drop in two years, the European Union statistics office reported.
Prices fell 0.2 per cent from the previous month as the cost of food and clothing declined and the overall drop would have been even larger had it not been for increases in the prices of holiday-related services.
The monthly drop in prices was bigger than the consensus forecast of a 0.1 per cent fall and meant the inflation rate was left unrevised from an early estimate, contrary to expectations it would be revised up to the European Central Bank's tolerance threshold of 2 per cent.
A heatwave in Europe is expected to have depressed agricultural production and will push up inflation in the euro zone in the third quarter, according to a Reuters survey.
But there was no sign that food prices were affected in July - the cost of food fell 0.3 per cent from the previous month and rose at the same 2.4 per cent annual rate seen in June.
Core inflation, which excludes volatile energy and unprocessed food costs, also eased in July. It fell to 1.9 per cent from 2.0 per cent in June as core prices fell 0.2 per cent from the previous month.