EUROPEAN Central Bank council member Mario Draghi says record oil prices are dictating the level of borrowing costs.

"The main element of concern remains the continued rise in the price of energy and other commodities," he told the Bank of Italy's annual assembly. This is "fueling inflation and limiting the direction of monetary policy. Medium-term price stability was and remains the objective."

There are few signs of inflationary pressures abating. Crude oil prices have gained 33 percent this year, reaching a record US$135.09 a barrel on May 22. Food commodities have also surged in the last year, boosting how much consumers are paying for staples such as bread and milk. Wheat, corn, rice and soybeans have risen to records this year as stockpiles shrink and demand climbs.

Inflation in the euro region is "worrying" and will stay at current levels for some months before slowing, if the oil price doesn't rise further, said Lorenzo Bini Smaghi, an ECB executive board member. "Based on the data that we have and based on oil-price data, which is very difficult to forecast, we predict inflation will stay at these levels for some months and then come down," he said.

The global rise of oil and commodity prices makes inflation more difficult to manage for central bankers, Nout Wellink, an ECB council member, told Dutch newspaper De Telegraaf. "Inflation is not 'home made,' like it used to be, so it's harder to tackle by a central bank," Wellink said.

Faster inflation is already eroding confidence among households, Bloomberg News said. European consumer confidence was its lowest in almost three years in May, and in Germany, Europe's largest economy, consumers also grew more pessimistic, according to a survey.

Italy barely dodged a fourth recession in a decade. Prime Minister Silvio Berlusconi's first act after taking office on May 8 was to cut tax on property and overtime pay and offer to freeze mortgage payments for people at risk of default.