(BRUSSELS) - The European Commission on Monday hiked its 2008 eurozone inflation forecast to 3.2 percent from 2.6 previously in the face of record oil and food prices but predicted that growth would suffer only slightly.

"We are facing a very challenging time regarding inflation," EU Economic and Monetary Affairs Commissioner Joaquin Almunia told reporters in Brussels, describing soaring consumer prices as a "major problem."

Despite the sharp upward revision to inflation, the European Union's executive arm only trimmed its eurozone growth estimate in its spring Economic Forecast to 1.7 percent from its last forecast of 1.8 percent in February.

The commission forecast that the second quarter would prove to be the weakest point of the current slowdown, with quarterly growth of only 0.2 percent before the economy started picking up again.

While record oil and food prices were taking their toll on growth and inflation, financial market turmoil and a US slump were proving to be worse than previously expected, the commission said.

In the 27-nation European Union, the commission forecast inflation would reach 3.6 percent this year, instead of the 2.9 percent previously expected, but stuck to its estimate for 2.0 percent economic growth.

"With the present level of oil prices above 100 dollars per barrel and with the high increase in food and other commodity prices, we are suffering a very strong inflationary shock," Almunia said.

"Inflation is distorting our capacity to weather in the best conditions possible the financial turmoil and inflation is... a big punishment on the weakest sectors of our society," he added.

The commission predicted that consumer price rises would peak in the second quarter and cool down over the remainder of the year and into 2009, bringing inflation in the eurozone down to 2.2 percent next year.

Driven ever higher by record commodities prices, 12-month eurozone inflation hit 3.6 percent in March, the highest since the 1999 launch of the shared currency and well above the European Central Bank's comfort level of just under 2.0 percent.

Unlike some other major central banks, the Frankfurt-based ECB has so far opted not to cut interest rates in the face of weakening growth, concentrating instead on keeping a lid on inflation.

In Vienna, ECB chief Jean-Claude Trichet described the current economic environment as "very challenging" but voiced confidence the ECB "will meet those challenges thanks to its stability-orientated monetary policy strategy."

While oil prices flirt with records close to 120 dollars a barrel, the EU executive said futures contracts suggested food prices would rise 54 percent in the first half of 2008 before stabilising.

However, not all was doom and gloom in the commission's report, with regional economic powerhouse Germany expected to perform better than the last time Brussels made forecasts in February.

Europe's biggest economy was forecast to grow 1.8 percent this year, rather than the 1.6 percent the commission predicted in February.

However, forecasts for some of Europe's other big economies were pared down. The French economy was projected to grow 1.6 percent in 2008 instead of 1.7 percent and Italian growth was cut to 0.5 percent from 0.7 percent previously.

Looking ahead to 2009, the commission predicted that economic activity would pick up towards the end of the year to about 2.0 percent in the eurozone at an annualised rate.

However, for the whole of 2009, it forecast eurozone growth would slow to 1.5 percent while activity in the overall EU economy would ease to 1.8 percent.

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