June 15 (Bloomberg) -- Finance ministers from the Group of Eight nations said surging food and fuel prices have replaced the credit squeeze as the biggest threat to the world economy.

``The predominant concern is the inflationary effect that oil in particular and also food prices are having,'' U.K. Chancellor of the Exchequer Alistair Darling said yesterday after G-8 officials ended talks in Osaka, Japan. Deputy German Finance Minister Thomas Mirow said oil's rise to a record means ``an enormous withdrawal of purchasing power.''

Inflation is accelerating after the price of oil reached an unprecedented $139.12 a barrel on June 6 and food costs from rice to soybeans set records this year. Central banks are already shifting toward tighter monetary policy even as worldwide economic growth cools.

``The G-8 is turning up the volume in terms of its inflation concern,'' said Claudio Piron, a currency strategist at JPMorgan Chase & Co. in Singapore.

In a statement, the ministers said the global economy faces ``headwinds'' and that risks to growth persist, with higher commodity prices posing a ``serious challenge.'' The ministers stuck to their practice of not making a joint comment on currencies when central bankers are absent from the talks. Even so, U.S. Treasury Secretary Henry Paulson and French Finance Minister Christine Lagarde spoke in favor of a strong dollar.

`Nation's Interest'

``A strong dollar is in our nation's interest,'' Paulson said. Lagarde said she was ``happy to hear'' that view. Japanese Finance Minister Fukushiro Nukaga said intervention in the currency market wasn't discussed by the G-8 ministers.

The dollar had its biggest weekly gain against the euro since 2005 on bets the G-8 governments would signal they favor further increases. The currency has dropped 30 percent on a trade-weighed basis since 2002.

The ministers cited further declines in U.S. house prices and stresses in financial markets as other growth risks, while noting conditions improved since they identified the credit squeeze as the major worry at their last meeting in April.

Mario Draghi, head of the Financial Stability Forum, said there is ``fragile stability'' in markets, and inflation has replaced tighter credit as the world economy's biggest obstacle.

The doubling in the price of oil in the past year was described as a ``strong'' concern by the officials, who urged producing nations to increase output and enhance their refinery capacity. Markets should promote transparency and consumers must use energy more efficiently, they said. Emerging economies were pushed to cease subsidizing food and fuel prices.

IMF Forecast

The International Monetary Fund predicts the fastest inflation in advanced economies since 1995 this year even as growth is the slowest in seven years. Rising prices threaten to damp growth further by sapping household budgets and boosting production costs. Prices have also sparked protests from Malaysia to Spain.

UAL Corp.'s United Airlines, the world's second-largest carrier, this week said it will start charging passengers more to check luggage, while Dow Chemical Co., the largest U.S. chemical maker, said last month it will raise prices by the most in its 111-year history.

The inflationary outbreak is grabbing the attention of central banks after 10 months in which they focused on insulating growth from the credit squeeze. The Federal Reserve is set to leave its key interest rate at 2 percent this month after seven cuts since September. The European Central Bank may raise its main rate to 4.25 percent in July.

Disagreement on Oil

There were disagreements over what's driving the surge in commodity prices. Lagarde and Russian Finance Minister Alexei Kudrin argued investors are buying oil and food as a hedge against the dollar's drop. Paulson downplayed the link by noting oil's gain outpaced the dollar's decline since 2002.

The U.S. Treasury secretary also refused to blame speculators for higher prices, saying ``all the evidence'' points to tight supply and robust demand.

Italian Finance Minister Giulio Tremonti disagreed by calling on governments to ``fight speculation'' and proposed limiting it by raising deposits for investors trading in futures markets, effectively making it more expensive to bet on oil prices.

The IMF was given the task of studying the forces behind higher oil costs.

The G-8 has had limited success in tempering oil prices since first lobbying for more supply in 2004, when crude cost about $40 a barrel. Goldman Sachs Group Inc. and Morgan Stanley predict oil may soon pass $150.

Oil Consumers, Producers

Oil consuming and producing nations are to meet later this month in Saudi Arabia. While OPEC President Chakib Khelil this week said ``supply is more than enough,'' Saudi Oil Minister Ali al-Naimi yesterday called record prices ``unjustified'' and the state oil company signaled it may soon start pumping from a new field.

The G-8 is composed of the U.S., Japan, Russia, Germany, France, the U.K., Italy and Canada. Its finance ministers met to form an agenda for when leaders convene next month in Hokkaido.

To contact the reporter on this story: Simon Kennedy in Osaka, Japan, at skennedy4@bloomberg.net.

Last Updated: June 14, 2008 11:56 EDT