Oct. 31 (Bloomberg) -- European inflation accelerated more than economists forecast in October, while confidence in the economy declined further, underlining the European Central Bank's quandary over whether to raise interest rates.

The inflation rate in the 13-nation euro area rose to 2.6 percent from 2.1 percent in September, the European Union's statistics office in Luxembourg said today. That is the highest in two years and above the 2.3 percent median forecast of 38 economists in a Bloomberg News survey. An index of executive and consumer sentiment fell to 105.9 in October from a revised 106.9 last month, according to a separate report.

An 80 percent jump in the price of oil since mid-January is stoking inflation, which the ECB aims to keep below 2 percent. At the same time, the central bank is trying to assess the impact of the collapse in U.S. subprime mortgages that has pushed up credit costs globally and threatens to curb economic growth.

``There's a deep divide in the ECB between hawks concerned about inflation risks in the short term and those more worried about the more structural risks to growth in the longer term,'' said David Brown, chief European economist at Bear Sterns International in London. ``This is going to resolve itself with the ECB probably sitting on their hands for quite a while.''

Economists had forecast that the confidence index would fall to 106.5 in October from a previously reported 107.1 in September.

Oil Prices

Crude oil prices reached a record $93.80 a barrel on Oct. 29. That increase, coupled with soaring food prices, exacerbated inflation at the same time as declining unemployment threatened to fuel wage growth. The October inflation rate is the highest since September 2005, when it was also 2.6 percent. The rate was last higher in June 2001, at 2.8 percent.

Unemployment fell to 7.3 percent in September from 7.4 percent in August, the lowest since the data were first collated in 1993, according to another report today. Eurostat, the statistics office, adjusted the August figure from 6.9 percent as part of revisions to the entire series.

The euro's appreciation to a record, which makes European exports less competitive, and higher credit costs sparked by the U.S. housing slump may slow growth in Europe. Manufacturing expanded at the weakest pace in more than two years this month, according to an industry survey published last week.

Agfa-Gevaert NV, Europe's largest maker of health-care imaging systems, today said its third-quarter loss widened because of higher raw-material costs and the stronger euro.

Record $1.4467

The euro, which has gained 14 percent in the last 12 months, reached a record $1.4467 against the dollar today. Measured against an index of the euro area's 24 main trading partners, the currency has risen 5.8 percent in the last year.

The ECB left its benchmark rate at 4 percent on Oct. 4 after doubling it since late 2005 to curb consumer-price growth.

ECB council member Axel Weber said yesterday that inflation will remain elevated ``well into 2008,'' and that the central bank will ``do what is necessary and required to ensure price stability over the medium term. His Austrian colleague, Klaus Liebscher, has called the threat of faster inflation ``significant.''

Other ECB council members have indicated they are more reluctant to raise interest rates, with Jose Manuel Gonzalez- Paramo saying the bank may ignore a jump in inflation if it is driven by previous oil-price movements.

Monetary Policy

``If it remains a base effect which doesn't lead to inflation risks materializing, monetary policy won't have to take it into consideration,'' he said on Oct. 24. ``A mechanical increase in inflation above 2 percent is not sufficient reason to change our assessment of risks to price stability.''

The industrial-confidence gauge fell to 2 in October from 3 in September, according to today's report, while the services and consumer measures were unchanged. Still, consumers' outlook for jobs and their financial situation declined.

The International Monetary Fund on Oct. 17 trimmed its forecast for euro-area economic growth this year to 2.5 percent from 2.6 percent. The fund cut its prediction for 2008 to 2.1 percent from 2.5 percent. The economy grew 2.8 percent last year, the fastest pace since 2000.

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

Last Updated: October 31, 2007 06:26 EDT