Euro zone inflation was lower than initially estimated in January but still well above the European Central Bank's target and likely to rise further in February due mainly to more expensive oil.

European Union statistics office Eurostat on Monday revised down its estimate for consumer price growth in the 17 countries using the euro to 2.3 percent year-on-year from an earlier projection of 2.4 percent and compared to 2.2 percent in December.

Month-on-month, prices fell 0.7 percent, more than the market consensus of a fall of 0.6 percent in a Reuters poll.

The downward revision is due to a marked drop in Italian inflation due to a change in its methodology, said Howard Archer, economist at IHS Global Insight.

The fact remains that euro zone consumer price inflation is still at a 27-month high and set to rise further in the near term due to the spike in oil prices as well as elevated commodity and food prices, Archer said.

Fuels for transport added 0.58 percentage points to the overall year-on-year reading and the rising costs of heating oil 0.19 percentage points. Electricity price rises added another 0.11 points and gas prices 0.1.

Fuel for transport was also the main upward driver in the monthly number, but it was more than offset by January sales of clothes and a drop in the price of holidays.

We expect it (year-on-year headline inflation) to be 2.5 percent for February, but that should be the peak for the year... after that we expect the oil price to come down slightly, and inflation will come down to about 2 percent in the middle of the year, said Christoph Weil, economist at Commerzbank.

ECB HEADACHE

The European Central Bank wants to keep inflation below, but close to 2 percent over a two-year horizon. The bank has said inflation was likely to peak in March, but that on average inflation in the euro zone may stay above 2 percent this year.

Not keen to raise interest rates anytime soon because of the fragility of the economic recovery in the euro zone, the ECB has stepped up its anti-inflation rhetoric, but economists do not expect a rate rise until October.

While the ECB will be far from happy to see euro zone consumer price above target and rising, it is still highly unlikely to prompt the bank into interest rate action at its March policy meeting on Thursday, Archer said.

For now, the ECB seems prepared to hold fire as long as second round inflationary effects remain contained, he said.

To gauge secondary inflation effects, the ECB also watches what it calls core inflation -- price growth excluding the volatile prices of energy and unprocessed food -- for signals that shocks from oil and food are translating into price rises elsewhere.

Core inflation fell 1.3 percent month-on-month in January for a 1.2 percent year-on-year rise, up from 1.1 percent in December.

The ECB puts a lot of weight on the headline rather than the core and there's also a general feeling that interest rates are too low, so this figure is going to do nothing to change the ECB in terms of the recent hawkish rhetoric that we've seen, said Nick Kounis, economist at ABN Amro.

A Reuters poll of more than 80 analysts, taken last week, saw a consensus view that the first rise in rates from the current 1.0 percent would come in the fourth quarter. But with inflation running above the ECB'S target -- and likely to jump higher on soaring energy prices -- expectations for an earlier hike are growing.

(Additional reporting by Charlie Dunmore, Ben Deighton and Eva Dou, editing by Rex Merrifield and Patrick Graham)

Inflation Down