LONDON -- Inflation in the 17 countries that use the euro eased moderately in December but still remains uncomfortably above the European Central Bank's target.
In a preliminary estimate, Eurostat, the EU's statistics office, reported Wednesday that inflation in the eurozone dropped to 2.8 percent in December from 3 percent the previous month. The decline was in line with expectations, so market reaction was muted.
Despite the decline, inflation in the eurozone remains higher than the European Central Bank's target of keeping price rises at just below 2 percent.
Above-target inflation has not prevented the European Central Bank, under new president Mario Draghi, from cutting interest rates over the past couple of months. The central bank has reduced its benchmark rate by a quarter percentage point on two occasions over the past couple of months, taking it to an all-time low of 1 percent.
The ECB has warned that risks to Europe's economy have mushroomed over the past few months, as the debt crisis that has so far seen three relatively small countries bailed out is threatening to spread to larger economies such as Italy and Spain.
The eurozone is expected to fall back into recession this year and that is likely to keep a lid on prices rises over the coming months.
James Ashley, an analyst at RBC Capital Markets, thinks inflation in the eurozone will fall below 2 percent by April on the back of lower energy price inflation and the weakening of the eurozone economy. As a result, he reckons the European Central Bank has room to cut rates further to a new record low of 0.5 percent in the first half of the year.
The slowdown in Europe was evident in a survey Wednesday suggesting that growth in Germany, Europe's largest economy, is poised to slow down sharply this year. The DIW economic think tank said it is lowering its 2012 growth estimate for Europe's largest economy to 0.6 percent and that it would likely slide briefly into recession before recovering by midyear.
DIW had previously forecast 1 percent growth for Germany in 2012 but says ongoing problems in other European Union will likely hurt German exports.
Other German economic think tanks are forecasting 2012 growth between 0.4 percent and 0.8 percent. The government's independent economic advisers are predicting 0.9 percent growth.