* Strong Saxony prices point to higher figure for Germany
* Higher inflation could put reignite tapering debate
* North Korea missile launch leaves bond market unmoved
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
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 on 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.”
Early data from the state of Saxony — which saw year-on-year inflation hit 2 percent — pointed to a strong figure for the country as a whole.
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 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 is minutes of the 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 will be informed by German inflation numbers due at 13.00 GMT.
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 percent and unchanged from October.
The rise in yields comes in the face of increased geopolitical risk after North Korea said it successfully tested a powerful new intercontinental ballistic missile that put the entire U.S. mainland within range of its nuclear weapons.
Normally, such a rise in political risk would put downward pressure on yields — which move inversely with prices — as investors retreat to the safety of government bonds. Analysts pointed to “headline fatigue” as a reason why it has not had a similar effect this time.
“It seems that with every new missile launch, the market shrugs it off sooner. The stock market in South Korea is flat, and that says it all,” said Van Vliet of ING.
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