* Strong Saxony prices point to higher figure for Germany
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* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds Gilt yields, graphic, updates prices)
By Abhinav Ramnarayan
LONDON, Nov 29 (Reuters) - Euro zone government bond yields edged higher ahead of the release of German inflation data that should give an early indication of the future direction of monetary policy in the bloc.
Consumer price data from Germany is due out today, and an improvement in core inflation — inflation after stripping out the effect of oil prices — in Europe’s biggest economy would put pressure on the European Central Bank to reduce stimulus.
“In recent months we have seen core inflation dropping, and that has been identified by the ECB as a key measure,” said ING strategist Martin van Vliet.
“So if we get a sign that there is a rebound, then investors start to see this is a very first development towards the ECB not extending (stimulus) beyond September next year.”
Data from several German states suggests overall German consumer inflation inched up in November, as the economy and labour market boomed — supported by loose euro zone monetary policy — and food and fuel costs rose.
German 10-year government bond yields were 2 basis points higher at 0.36 percent and most other euro zone bond yields were also higher by 1-2 bps on the day.
A key gauge of long-term inflation in the bloc, the five-year forward, closed on Tuesday at its highest level in over eight months at 1.6955 percent.
The ECB in late October extended its 2.4 trillion euro bond-buying scheme until at least September 2018, as it attempts to push inflation in the bloc up to its key target of just below 2 percent.
Though this remains the main target, ECB President Mario Draghi has in the past said that he will look past any one-off spikes in inflation caused by the fluctuations in oil prices, and suggested that rising core inflation would point to a sustained upward trend in consumer prices in the bloc.
In October, euro zone inflation eased to 1.4 percent and, after stripping out food and unprocessed food, was just 1.1 percent, its lowest since May.
Any reversal in this trend would put pressure on Draghi - particularly as the minutes of the ECB’s October meeting showed many ratesetters had argued against leaving bond purchases open-ended in 2018.
Euro zone consumer price data is due out on Thursday and the German inflation numbers due at 1300 GMT will give an indication of what can be expected for the bloc.
Spain also released inflation data on Wednesday, with consumer prices rising 1.7 percent year-on-year in November, below a Reuters poll of 1.9 and unchanged from October.
British two-year government bond yields touched their highest level since June 2016’s Brexit vote on Wednesday as bond prices fell after media reports that Britain was close to a deal with the European Union on how much it needs to pay to leave.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Abhinav Ramnarayan Editing by Jeremy Gaunt and Ken Ferris