By Jennifer Yousfi
Managing Editor

Odds of a future rate hike for the European Central Bank (ECB) increased yesterday (Monday) on news that Eurozone inflation hit a 16-year high in May.

With inflation accelerating “it becomes increasingly difficult to argue against an ECB hike in July,” Carsten Brzeski, an economist at ING Groep NV (ADR: ING) in Brussels, told Bloomberg News.

Soaring food and energy costs pushed inflation up 0.6% in May to an annualized rate of 3.7%, an increase from April’s 0.3% monthly rate and 3.3% annual rate.

High commodity costs fueled the increase, as food costs shot up 6.4% in May, up from 6% in April. Energy prices soared 13.7% year-over-year on the back of record high oil, up from a 10.8% increase the prior month, the European Union’s Luxemburg-based statistics office said.

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Germany, Europe’s largest economy, had a lower inflation rate of 3.1%. Inflation in France and Italy was at 3.7%. Slovenia had the highest inflation rate at 6.2%.

The troubling figures only serve to reconfirm ECB President Jean-Claude Trichet’s hawkish stance as the inflation rate has increased for nine consecutive months.

“The ECB is concerned that the higher the headline inflation rate goes, and the longer it stays elevated, the greater will be the danger of major second round inflationary effects occurring,” Horward Archer, chief economist at Global Insight Inc., told Forbes.

Worrisome signs of secondary inflation effects are already cropping up. Eurozone labor costs increased 3.3% in the first quarter, up from a 2.9% increase in the fourth quarter of 2007. Producer-price inflation is also increasing.

Trichet has said the ECB is willing to increase its key interest rate in order to fight rampant inflation. A 25 basis point increase is expected when the ECB next meets on July 3, which would take the rate from its current 4.0% to 4.25%.

Anticipation of the ECB rate hike pushed the euro higher versus the dollar. The dollar had experienced a small rally last week after comments from U.S. Federal Reserve Chairman Ben S. Bernanke led investors to expect a tougher stance on inflation from the Fed.

The euro hit an intraday high of $1. 5519 in early morning New York trading, according to Dow Jones data.

News and Related Story Links:

• MarketWatch:
  Euro-zone inflation hits new high in May

• Forbes:
  Euro Inflation Climbs, Rates To Follow

• Bloomberg News:
  European Inflation Accelerates to Highest in 16 Years

• FXStreet.com:
  Dollar Extends Overnight Decline; Euro Rises To $1.5500

• Money Morning:
  Investors Will Watch as Inflation Dominates the Spotlight This Week

• Money Morning:
  ECB Stands Firm Against Inflation