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 policy makers adamant on keeping a lid on inflation expectations, these more-difficult choices mean economic growth will face significant headwinds in the short term,'' said Deirdre Ryan, an economist at Goodbody Stockbrokers in Dublin. Growth will ``struggle to make any meaningful gains without the aid of an easing monetary policy.''

The euro was up 0.3 percent to $1.5427 against the dollar at 10:35 a.m. in London, close to its high for the day of $1.5450.

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 in some weeks,'' he said.

The 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.

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.

Labor Costs

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 on June 13. Producer-price inflation accelerated to the fastest in more than seven years in April, separate data show.

``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.

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 05:49 EDT