Inflation in the 15 countries sharing the euro eased in April off record highs in March but confidence in the economy sank to a the lowest point in two-and-a-half years, EU data showed Wednesday.
Annual inflation in the eurozone cooled to 3.3 percent from 3.6 percent in March when consumer prices rose at the fastest rate on record in the bloc, according to a first estimate from the European Union's Eurostat data agency.
Private sector economists had expected inflation to ease in April to 3.4 percent after hitting the March peak, driven by soaring oil and food prices.
Despite the lower rate, inflation remained far above the European Central Bank's comfort level, which it defines as just below 2.0 percent on an annual basis.
Unlike some other major central banks such as the US Federal Reserve, the Frankfurt-based ECB has so far opted to keep its interest rates unchanged at 4.00 percent despite weakening growth, concentrating instead on keeping a lid on inflation.
On Monday, the European Commission sharply raised its 2008 inflation estimate for the eurozone to 3.2 percent from 2.6 percent while trimming back only slightly its growth forecast to 1.7 percent.
Despite the lower inflation in April, confidence in the European economy fell more sharply than expected, slumping to the lowest point in two-and-a-half years.
The European Commission's eurozone economic sentiment indicator in April fell to 97.1 points from 99.6 in March, hitting the lowest point since August 2005 and falling well short of economist forecasts for 99 points.
The commission's economic sentiment indicator for the 27-nation European Union also fell to the weakest level since August 2005, at 98.1 points in April compared with 101.9 points in March.
Despite the slight respite on the inflation front, economists said the latest batch of eurozone data did little to dispel the gloom gathering over the bloc's economic outlook.
"The latest eurozone data do little to change the picture of a moderate slowdown in activity at a time of high inflation," said Jennifer McKeown at consultants Capital Economics.
Confidence was broadly weaker across all sectors of the economy, with only the outlook among consumers in the eurozone stable, albeit at a low level, the survey showed.
Although confidence weakened only moderately in regional heavyweight Germany, bigger declines were seen in other large European economies and plunged sharply in Britain.
Separately, the commission's monthly business climate survey also painted a dismal picture, falling to the lowest point since January 2006.
"The eurozone economy is now being increasingly hit by tight credit conditions and financial market instability, the very strong euro, slowing global growth, and elevated oil, commodity and food prices," said economist Howard Archer with consultants Global Insight.
Despite the weaker economic activity, Eurostat said unemployment in the eurozone held steady in March for the third month running at a record low of 7.1 percent.
Although the eurozone economy has slowed over the past year, unemployment has maintained a gradual decline in the bloc. The jobless rate was down from 7.5 percent in March 2007.
Capital Economics' McKeown said slowing activity could provide some relief in the form of lower inflation, which in turn could prompt the ECB to cut its main interest rate from 4.0 percent currently.
"It will not be too long before slowing activity begins to exert fundamental downward pressure on inflation," she said.
"We still expect the ECB to start cutting interest rates in the third quarter and see rates falling to 3.0 percent in the first half of next year," she added.