April 25 (Bloomberg) -- Inflation in Germany, Europe's largest economy, accelerated for the first time in seven months in April as oil and fuel costs rose, making an interest rate increase by the European Central Bank more likely.

The inflation rate increased to 2 percent from 1.8 percent in March, the Federal Statistics Office in Wiesbaden said today. Economists expected German inflation to accelerate to 1.9 percent, according to the median of 35 estimates in a Bloomberg New survey. From a month earlier, consumer prices gained 0.4 percent.

The ECB, which raised its main interest rate last month to combat inflation, has said that it still sees risks to price stability. ECB Vice President Lucas Papademos said today that, ``both economic analysis and monetary analysis indicate that upside risks to price stability prevail.''

``The risk to the euro-zone number is definitely on the upside,'' said Dominic Bryant, an economist at BNP Paribas in London in an emailed research note. ``Ex-energy price inflation appears to have crept higher in April, in line with our long-held view that high energy prices would eventually start to filter through into core prices.''

Oil prices have more than doubled in the past two years and reached a record of $75.35 per barrel April 21. A barrel cost $72.35 in electronic trading on the New York Mercantile Exchange at 6:10 p.m. in Frankfurt today. That's 33 percent more than a year ago.

Above the Limit

In the 12 countries that share the euro, the inflation rate was at 2.2 percent in March, remaining at or above the ECB's 2 percent ceiling for the 14th month, the European Union's statistics office said April 20. In Spain, underlying inflation, which excludes energy products and fresh food, accelerated to 3.1 percent in March. That's the fastest pace in three years.

``The Governing Council will continue to monitor very closely all developments, so as to ensure that risks to price stability do not materialize,'' Papademos said today.

German producer price inflation in March held at the 24-year high reached in February, led by a surge in energy costs, the Federal Statistics Office said last week. Producer prices act as an early indicator of price pressures in the economy.

Import prices rose for a fourth month in March, driven by gains in energy costs, the Federal Statistics Office said today.

Ifo Surprise

None of this seems to cloud the sentiment among German executives. The Ifo business confidence index, based on a survey of 7,000 managers, unexpectedly rose to 105.9 today, a 15-year high.

Higher energy costs have forced consumers to spend more on gasoline and utilities, making it harder for companies to pass on their fuel expenses to customers.

ECB council member Yves Mersch said in an interview published today he's concerned about a surge in liquidity and oil prices pushing up inflation, suggesting he may back further interest rate increases.

Central bankers are troubled that this, coupled with a 3 percentage point increase in value added taxes to 19 percent early next year in Germany, is prompting workers to demand more pay.

Bundesbank president and ECB council member Axel Weber said yesterday that he and the other 17 European Central Bank policy makers are monitoring oil prices to see if they prompt demands for higher wages. He said he expects that the 3 percentage point pay increase agreed between Germany's IG Metall trade union and employers won't become ``the benchmark'' for Germany.

Investors have increased bets that the central bank will raise interest rates to at least 3.25 percent this year, futures trading suggests. The implied yield on the three-month contract for December settlement was at 3.48 percent at 6:10 p.m. today.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.

Following is a breakdown of monthly and annual consumer price changes in the six states. The previous month's performance is noted in parentheses. Baden-Wuerttemberg reports April figures tomorrow.

                        Monthly             Yearly
                        Change              Change
Hesse                    0.4%   (-0.1%)      1.8%   (+1.2%)
Brandenburg              0.4%   (+0.1%       2.5%   (+2.1%)
North Rhine-Westphalia   0.3%   (+0.2%)      1.9%   (+1.6%)
Baden-Wuerttemberg       n/a    (+0.3%)      n/a    (+1.9%)
Bavaria                  0.5%    (0.0%)      2.5%    (+2.0%)
Saxony                   0.4%   (+0.1%)      2.6%   (+2.3%)

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net

Last Updated: April 25, 2006 12:30 EDT