Nov. 15 (Bloomberg) -- European prices for bread, cheese and other food increased in October at the fastest annual pace in more than five years, pushing the overall inflation rate further above the European Central Bank's 2 percent ceiling.

Food-price inflation in the 13-nation euro region accelerated to 3.8 percent last month, the highest rate since March 2002 and up from 2.4 percent in September, the European Union's statistics office in Luxembourg said today. Overall inflation quickened to 2.6 percent, the highest in two years.

Soaring food and energy prices have propelled inflation to a level that ECB policy makers call a ``serious risk.'' While ECB members say they are ready to increase interest rates to prevent rising inflation expectations from triggering a price spiral, cooling economic growth may limit their ability to act, economists say.

``We expect headline inflation to move higher from current levels, dangerously approaching the 3 percent threshold by end 2007 or early 2008,'' said Marco Valli, an economist at Unicredit MIB in Milan. ``With the hands tied by the slowdown in GDP momentum, the ECB has no choice but to leave the rate unchanged for several more months.''

The central bank shelved a planned interest-rate increase in September. It opted to leave the rate unchanged at 4 percent for a fifth month last week to allow more time to assess whether the financial turbulence will slow the economy's expansion.

Milk and Cheese

Prices for eggs, milk and cheese jumped 7.6 percent in October from a year earlier and had the second-biggest upward impact on the overall inflation rate, today's report showed. Prices for bread and cereals increased 5.4 percent.

Nestle SA, the world's largest food company, raised prices on dairy products by as much as 8 percent in the first nine months of this year. The company expects to spend at least 30 percent more on milk purchases this year.

The biggest boost to October inflation came from fuels for transport, which have soared 8.9 percent in the past year as oil prices climbed to a record. Crude oil in New York has risen almost 60 percent in the last 12 months and traded at $93.60 a barrel today. It reached an all-time high of $98.62 last week.

ECB Executive Board member Juergen Stark today said inflation risks in the euro area ``continue to be on the upside'' and have ``intensified recently.'' The October inflation rate was a ``surprisingly high 2.6 percent, mainly driven by a sharp rise in oil and non-oil commodities including agricultural prices,'' he said in Munich.

`Intensified'

ECB governing council member Miguel Angel Fernandez Ordonez yesterday signaled concern that a jump in euro-area consumer prices last month may send inflation expectations higher.

``The persistence'' of price increases ``entails the serious risk that inflation expectations could become unhinged,'' Ordonez said in a speech in Santiago, Chile. ``As a result, our credibility as central bankers could be significantly damaged.''

The price of wheat, as measured by the Merrill Lynch Commodity Index, has increased 43 percent this year. Indonesia's PT Indofood Sukses Makmur, the world's biggest instant-noodle maker, yesterday said it will increase prices for a third time in six months to cover the rising cost of wheat and palm oil.

The so-called core rate of inflation, which excludes energy, food, alcohol and tobacco prices, was 1.9 percent in October, compared with 1.8 percent in September. From the previous month, euro-area consumer prices rose 0.5 percent in October, according to today' report.

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.

Last Updated: November 15, 2007 07:42 EST