June 16 (Bloomberg) -- European inflation accelerated to the highest in 16 years last month as food and energy costs soared, intensifying what finance ministers from the world's richest nations said 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 today. The rate for May 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 yesterday after a meeting in Japan. European Central Bank President Jean-Claude Trichet this month said the ECB may raise its benchmark interest rate 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. ``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 0.7 percent to $1.5490 against the dollar at 1:55 p.m. in London, close to its high for the day of $1.5498.

Food Prices

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 today. Food prices ``will establish themselves on a higher level but not at the peaks we have seen,'' he said.

In the U.K., inflation probably reached 3.2 percent in May, the most since the measure's inception in 1997, according to the median of 39 economists surveyed by Bloomberg News. A rate that high would require Bank of England Governor Mervyn King to write a letter of explanation to the Treasury. The statistics office in London will publish the data tomorrow.

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 and their own prices, fanning inflation.

This Year

Investors expect the ECB to raise its key rate to 4.5 percent this year from 4 percent currently, according to Eonia forward contracts.

``We have to remain extremely careful to avoid a wage and inflation spiral, which would not be in the interest of anyone, starting with the workers of Europe,'' Amelia Torres, spokeswoman for EU Economic and Monetary Affairs Commissioner Joaquin Almunia, told reporters in Brussels today.

European labor costs rose 3.3 percent in the first quarter, more than economists forecast and higher than the 2.9 percent rate in the prior three months, according to figures published June 13. Producer-price inflation accelerated to the fastest in more than seven years in April, separate data showed.

``It doesn't necessarily imply second-round effects are materializing, but is indicative of intensifying domestic inflation pressures,'' ECB Vice President Lucas Papademos said today in Jeju, South Korea.

Core Rate

The euro area's 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 today's report.

Some ECB policy makers have moved in the last week to damp market speculation that the central bank would embark on a series of rate increases next month. The ECB aims to keep inflation close to, but below, 2 percent.

``We are not talking about a series of rate increases,'' ECB Executive Board member Juergen Stark said in an interview published June 11. Still, the ECB ``will do everything that is necessary to anchor inflation expectations and to deliver price stability in the medium term.''

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

Last Updated: June 16, 2008 09:00 EDT