EUROPEAN inflation has accelerated to the highest in 16 years last month as food and energy costs soared, intensifying what finance ministers say is becoming a "more complicated" dilemma.
The inflation rate in the euro area rose to 3.7 percent, the highest since June 1992, from 3.3 percent in April, the European Union's statistics office in Luxembourg said yesterday. The rate is higher than the 3.6-percent estimate published on May 30.
Soaring commodity prices have pushed up costs for companies and consumers and at the same time are posing a "serious challenge" to economic growth, officials from the Group of Eight nations said on Sunday after they had a meeting in Japan.
European Central Bank President Jean-Claude Trichet this month said the ECB may raise its benchmark interest rate by a quarter point in July, signaling he is setting aside concerns about the economy's expansion to combat inflation.
With inflation accelerating "it becomes increasingly difficult to argue against an ECB hike in July," said Carsten Brzeski, an economist at ING Group in Brussels, Belgium. "However, we still believe that a July rate hike would be a one-off, mainly to flaunt the ECB's willingness to fight any second-round effects."
The euro was up 0.6 percent to US$1.5467 against the dollar at 11:50am in London yesterday, close to its high for the day of US$1.5474.
Food-price inflation accelerated to 6.4 percent in May from 6 percent in April, while energy prices rose 13.7 percent from a year earlier, up from a 10.8-percent increase the previous month, the statistics office said.
High food prices "are here to stay" as governments divert resources to make biofuels, amass stockpiles and limit exports, Peter Brabeck-Letmathe, chairman of Nestle SA, the world's largest food company, said yesterday. Food prices "will establish themselves on a higher level but not at the peaks we have seen in some weeks," he said.
The core rate of inflation, which excludes volatile food and energy costs, rose to 1.7 percent in May from 1.6 percent in April, according to Bloomberg News.
The ECB, which signaled the possible interest-rate increase on June 5, is concerned about the emergence of second-round effects, when consumers and companies seek compensation for higher costs by pushing up salaries, their own prices, fanning inflation.
"We have to remain extremely careful to avoid a wage and inflation spiral, which would not be in the interests of anyone, starting with the workers of Europe," said Amelia Torres, spokeswoman for EU Economic and Monetary Affairs Commissioner Joaquin Almunia.
European labor costs rose 3.3 percent in the first quarter.