BRUSSELS, May 28 (Reuters) - Euro zone economic sentiment improved more than expected in May in yet another sign the low point of the recession may have passed, but inflation expectations fell further, raising the spectre of deflation.
A monthly survey by the European Commission released on Thursday showed economic sentiment in the 16 countries using the euro rose to 69.3 points in May from 67.2 in April, the second straight improvement from a trough of 64.7 points in March. [ID:nBRQ007359]
Economists polled by Reuters had expected a rise to 69.0.
The improvement was fuelled by increased sentiment in the retail sector, industry and services. Sentiment among consumers and in the construction sector did not change.
The Commission survey also showed that inflation expectations 12 months ahead among households fell again in May to set a new low of -7 points from -2 points in April.
Selling-price expectations among manufacturers fell to -12 from -11 in April, retreating closer to the all-time low of -14 reached in March.
The European Central Bank watches inflation expectations closely in its policy decisions, aiming to anchor them at its price stability target of inflation just below 2 percent over the medium term.
Consumer inflation was 0.6 percent year-on-year in March and April. The EU statistics body, Eurostat, will publish its estimate for May on Friday with economists forecasting a further decline to 0.2 percent.
ECB officials have said the bank will act to prevent inflation from falling too far below target, even though they saw no risk of deflation despite a few months of falling prices expected in some euro zone countries in the third quarter.
The ECB has said that for deflation to exist there must not only be a protracted period of negative inflation, but also negative inflation expectations, which would make consumers hold back purchases. (Reporting by Jan Strupczewski, editing by Dale Hudson)