MADRID, March 12 (Reuters) - Spanish inflation fell to 0.7 percent in February, as expected, its lowest since 1969 as retailers held down prices and fuelled fears of deflation during Spain's worst recession in at least half a century.
Year-on-year inflation eased from 0.8 percent in January, with clothing shops offering steep discounts and hotels and bars cutting prices to lure customers spooked by the fastest rising unemployment of any OECD country, National Statistics Institute Data showed on Thursday.
Spanish core inflation, which discounts volatile food and energy components, fell to a lower-than-expected 1.2 percent in February from 2 percent the previous month.
That showed prices were falling rapidly across the wider economy as it faced what Spain's second largest bank BBVA fears could be the worst recession since the 1936-1939 Civil War, with a 2.8 percent decline in 2009 gross domestic product.
"What concerns us is as headline inflation goes into negative territory later in the year, if this is enforced by lower than expected core inflation it could lead us into the territory of deflation," said UBS economist Stephane Deo.
Other economists were less worried about such a scenario and saw headline inflation dipping into negative territory by May and staying there until September, without turning into the kind of long term negative trend that is deflation.
"The lowest point should be July, with a fall of around 1.1 percent," said Xavier Segura of Caixa Catalunya, who saw year-on-year inflation reaching 1.4 percent by year end. (Reporting by Paul Day and Manolo Ruiz; Editing by Andrew Hay)