June 6 (Bloomberg) -- European Central Bank President Jean- Claude Trichet is leading the way as the world's most powerful monetary-policy makers turn their attention from protecting economic growth to fighting inflation.

Trichet yesterday said the ECB may raise interest rates as soon as next month, two days after Federal Reserve Chairman Ben S. Bernanke indicated he's finished cutting for now. A near doubling in the price of oil in a year and record food costs are forcing central bankers to look beyond weaker consumer spending and focus more on restraining inflation expectations.

Officials are stepping back from the crisis mode that's characterized policy since August as central banks fought the credit crunch with a combination of rate cuts and billions of dollars in extraordinary loans to banks. The Fed, Bank of England and Bank of Canada pared borrowing costs, while the ECB interrupted its tightening.

``The joint message from central bankers is that interest rates are likely to hold at current rates or go higher,'' said Vincent Reinhart, a former Fed economist who now works at the American Enterprise Institute in Washington.

While the ECB left its key interest rate at 4 percent yesterday, Trichet surprised investors by saying that a rate increase next month is ``not excluded'' and that the bank is monitoring prices with ``heightened alertness.'' Inflation, which the bank aims to keep just under 2 percent, accelerated to a 16-year high of 3.6 percent in May.

Surprising Markets

The euro surged and bond yields rose to the highest level since 2001. At least a dozen banks now predict the ECB's 21 policy makers will raise rates at their next meeting on July 3, including Lehman Brothers Holdings Inc., BNP Paribas SA and Commerzbank AG. A May 30 survey of 32 economists by Bloomberg News showed none had expected higher rates this year.

If Trichet, 65, follows through on his threat, he would be ignoring an economic slowdown gripping the 15-nation euro region this quarter. European retail sales declined by a record 2.9 percent in April, confidence among households in France dropped to an all-time low last month and data today showed industrial production in Germany unexpectedly fell for a second moth in April. Higher rates would particularly hurt economies such as Spain and Ireland where housing markets are crumbling, exacerbating a divergence in the region as Germany displays signs of resilience and wages there pick up.

Forecasts in Flux

``Trichet is throwing the gauntlet down,'' said Ken Wattret, an economist at BNP Paribas in London. ``The No. 1 priority for the ECB is to rein in inflation, and if that means a hard landing, so be it.''

Economists are split over how far the ECB will go. Laurent Bilke of Lehman Brothers said deteriorating expansion means the ECB will have to ``reverse its stance'' by year-end. Dario Perkins of ABN Amro Holding NV predicts the ECB will raise rates twice, with a second increase in October. Citigroup Inc.'s Jose Luis Alzola said incoming economic data may prevent a shift next month altogether.

Trichet's sharper language comes as investors anticipate the Fed will leave its main rate at 2 percent this month after cutting it by 3.25 percentage points since September. Bernanke said June 3 that ``for now, policy seems well positioned to promote moderate growth and price stability over time.''

The Bank of England yesterday kept its main rate at 5 percent for a second month after predicting inflation will exceed the government's upper limit. Central banks in Indonesia and the Philippines also raised interest rates yesterday and those in Brazil, Peru, Norway, Hungary and South Africa have done so in the past two months.

Inflation Risks Rising

``The aggregate effect of the crisis on inflation is far from obvious,'' Swiss National Bank Governing Board member Thomas Jordan said in Geneva today. ``Consequently, central bankers are currently challenged not only on the financial stability front, they also need to be extremely alert to developments on the price stability front.''

The sentiment of central banks is shifting after they eased monetary policy or postponed rate increases to compensate for the credit squeeze that may still tip the U.S. into a recession. Before credit costs jumped globally as the U.S. subprime mortgage market collapsed, the ECB had planned a rate increase in September. The Bank of Canada may still lower its benchmark rate next week.

Wage-Price Spiral

Jim O'Neill, chief economist at Goldman Sachs Group Inc., said the fear of central banks is that they repeat the mistakes of the 1970s when they failed to check surging commodity prices and were forced to impose even higher interest rates as inflation spiraled. The International Monetary Fund already estimates inflation to be running at its fastest since 1995 in advanced economies.

Crude oil futures reached a record $135.14 a barrel on May 22 and the price of food rose 53 percent in the 12 months through April, according to the United Nations. Such forces are prompting consumers and businesses to anticipate higher inflation, risking a wage-price spiral if they seek compensation.

Trichet said the ECB wants ``to secure the solid anchoring of inflation expectations.'' The so-called breakeven rate on five-year French inflation-linked notes has jumped in the past two months, climbing to 2.39 percent from 2.19 percent in April.

``The comparison with the 1970s has aspects of reality,'' said O'Neill in London. ``That is at the forefront of central banks' thinking.''

If Trichet beats inflation and avoids recession, he may attract more plaudits on top of those he received by leading the ECB's response to last year's credit crisis. The bank this week celebrated its tenth anniversary.

``Arguably, the ECB is the only central bank to emerge from the financial crisis with its credibility intact,'' said ABN Amro's Perkins.

To contact the reporter on this story: Simon Kennedy in Paris at Skennedy4@bloomberg.net

Last Updated: June 6, 2008 07:23 EDT