Food, fuel drives Euro-zone inflation up 3.7 pct

Mon Jun 16, 2008 7:22 AM EDT

BRUSSELS — Annual inflation in the euro zone rose to a new high of 3.7 percent in May, according to data released Monday that reflects surging food, fuel and housing prices across the 15-nation currency bloc.

The annual inflation rate was up from 3.3 percent in April and from 1.9 percent in May last year, according to figures from the European Union's statistics agency. Inflation in the euro zone is now running at the highest since Eurostat started keeping records for each nation in 1996.

Across the whole 27-nation EU, inflation was at 3.9 percent, up from 3.6 percent in April and 2.1 percent in May, 2007.

The main drivers of inflation were food prices that jumped 6.4 percent over the year, transport costs that rose 5.9 percent and housing, which rose 5.7 percent, Eurostat said.

Rising inflation increases the pressure on the European Central Bank to raise interests at its next meeting, despite the risk of slowing growth amid a global financial crisis, a possible U.S. recession and soaring energy costs.

Central bank President Jean-Claude Trichet last week said rates could go up by "a small amount" at the bank's next meeting.

Inflation is now far above the European Central Bank's recommended guideline of just under 2 percent.

"It's not a good figure," European Commission spokeswoman Amelia Torres told reporters. "Inflation is our main concern."

She repeated calls from EU headquarters for governments and employers to avoid wage deals that could further push up inflation.

"This shows that we have to remain extremely careful in order to avoid a wage and inflation spiral which would not be in the interests of anybody, starting with the workers of Europe."

EU headquarters warned the euro-zone economy may only grow by 1.7 percent this year, well below last year's strong 2.6 percent. However Trichet says keeping prices stable is his priority, adding that that growth and jobs are not endangered.

So far unemployment in the euro zone isn't budging from an all-time low. It was 7.1 percent in April, the same level it has stayed at since December 2007.

But economic confidence in the region is at its lowest level in nearly three years as consumers and businesses are downbeat about future prospects.

Unicredit economist Marco Valli said in a research note that the so-called core inflation rate, excluding volatile food and energy prices, only rose to 1.7 percent from 1.6 percent.

He added that "the ECB won't be impressed by the low core inflation reading and will most likely hike rates next month. But further tightening beyond July seems unnecessary at this stage."