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Policy-makers call inflation top threat

BRUSSELS/JEJU, South Korea (Reuters) - Policy-makers around the globe declared soaring inflation a top threat on Monday, with pressure rising for central banks to raise interest rates amid protests against higher costs of living.

The European Commission, the European Union's executive arm, said inflation was its main economic concern after data showed prices in the 15 countries using the euro rose a record 3.7 percent year-on-year in May from 3.3 percent in April.

The comments boosted the euro against the dollar because they fueled speculation the European Central Bank may raise interest rates at its July 3 meeting by more than the 25 basis point hike already expected, traders said.

Inflation in the euro zone, as elsewhere, is fueled by food and energy costs, which are surging on steadily rising demand from fast-growing economies like China and India and some supply disruptions.

EU finance ministers believe the weakness of the U.S. dollar and speculation also play a role.

Talking to European and Asian finance ministers meeting on the South Korean resort island of Jeju, South Korean President Lee Myung-bak said the inflation surge was the biggest challenge the economy had faced in some 30 years.

"It's no overstatement to say that the world is faced with the gravest crisis since the oil shock of the 1970s, with oil, food and raw materials prices skyrocketing," he said.

Finance ministers from the United States, Canada, Japan, France, Germany, Italy, Britain and Russia, meeting in Japan over the weekend, warned that soaring commodities prices could damage economic growth.

But they did not come up with any plans to calm financial markets or quell public protests over the rising cost of living.

PROTESTS

Protests by truckers, fishermen and other groups particularly vulnerable to rising energy costs have swept across countries from Spain to India and South Korea in recent weeks.

On Monday, French truckers began blocking roads in the latest protest to pressure the government to help them cope with oil prices that have more than doubled in a year.

Colombian truck drivers staged strikes on Monday to protest high fuel costs and road tolls and demanded higher transport payments after failing to reach a deal with the government.

U.S. crude oil prices ended slightly lower, down 25 cents at $134.61 a barrel, as investors reassessed the impact of a potential increase in production from the world's top producer, Saudi Arabia. Oil prices are still double from a year ago.

Crude prices fell after earlier hitting a record high just under $140 a barrel due to the weaker U.S. dollar and supply disruption concerns in the North Sea.

Floods across America's Midwest, the country's prime cropland, exacerbated supply concerns and boosted the price of corn above $8 a bushel for the first time. before closing down at $7.87.

Competing forces of higher human and animal consumption of grains, plus bio-fuel production, are keeping prices elevated.

Rising prices are helping fuel the economic renaissance in emerging markets. But they are also strengthening inflation pressures, and central banks in these markets have already started to raise interest rates to keep them in check.

Politicians worry inflation will undermine economic growth. Brazilian President Luiz Inacio Lula da Silva on Monday told investors in Sao Paulo that the fight remains a top priority.

In the United States, the president of the Richmond Federal Reserve Bank, Jeffrey Lacker, told business and community leaders the U.S. central bank can keep interest rates on hold for the moment but should not leave them too low for too long.

Inflation was the biggest worry for Asia, Asian Development Bank Managing Director-General Rajat Nag told Reuters on Sunday in Kuala Lumpur, because it threatens to erode the gains made in fighting poverty over the last two decades.

Britain's leading employers' group said on Monday that rising oil and food prices and feeble consumer demand would slow the country's economy to its weakest growth rate in almost two decades next year.

Recent comments from U.S. Federal Reserve and ECB officials have raised market expectations the world's central banks would start to raise interest rates to try to calm price pressures.

ECB Governing Council member Nout Wellink kept up the bank's recent hawkish rhetoric on Monday, saying after the release of euro zone inflation data that keeping price growth under control was the bank's top priority.

He repeated the ECB's message about the possibility of a rate rise in July and joined other ECB governors in playing down the possibility of a series of ECB rate increases. But some economists believe more could materialize.

"The message has been clear enough but it's too early to speculate on the next half of the year," Wellink told reporters on the sidelines of a microfinance conference in Amsterdam.

Similarly hawkish messages came from ECB Vice President Lucas Papademos and ECB Executive Board Member Gertrude Tumpel-Gugerell.

(Additional reporting by Daniel Bases in New York)

(Writing by Jan Strupczewski; Editing by Leslie Adler)

By Jan Strupczewski and Yoo Choonsik
1 hour, 44 minutes ago