Inflation in the 17 countries that use the euro eased slightly in December but still remains uncomfortably above the European Central Bank's target.

In a preliminary estimate, Eurostat, the European Union's statistics office, reported yesterday that inflation in the eurozone fell to 2.8 percent in December from 3 percent in November. The decline was in line with expectations, so market reaction was muted.

Despite the drop, inflation in the eurozone remains higher than the ECB's target of keeping price rises at just below 2 percent.

Above-target inflation has not prevented the ECB, under new president Mario Draghi, from cutting interest rates over the past couple of months. The central bank has cut 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 nations bailed out is threatening to spread to larger economies like Italy and Spain.

The eurozone may 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. He says the ECB can 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 yesterday suggesting that growth in Germany, Europe's largest economy, may slow sharply this year.