EURO-ZONE inflation has been revised up to the highest level for 16 years and a European Central Bank official has warned that rising wage costs could add increasingly to the pressures created by soaring oil prices.

Annual inflation in the 15-country region last month was 3.7 per cent, according to Eurostat, the European Union's statistical office. That was up from 3.3 per cent in April.

Higher inflation rates have not been recorded since the euro zone was created in January 1999 and not since June 1992 on a comparable basis. Eurostat had originally reported a 3.6 per cent inflation rate for May.

The equivalent figure for the Republic last month was 3.7 per cent, the highest level since September 2003.

Retail sales figures for April, released last week, showed that consumers are cutting back on purchases.

Goods bought during April were 3.2 per cent lower than in the same month of 2007, the largest fall in five years.

Inflation in the euro zone has been driven higher by sharp rises in oil and food prices - and is expected to move closer to 4 per cent in coming months. But the ECB has shown signs of becoming more worried about general price pressures, which helps explain why it has announced that it is likely to raise its main interest rate by a quarter percentage point to 4.25 per cent in July.

Earlier this month, Jean-Claude Trichet, ECB president, warned of mounting inflationary pressures in the service sector.

But wage pressures are also emerging as an ECB ­concern.

An acceleration in wage growth at the start of this year "could continue in 2008 in an economic environment characterised by tight labour markets, high-capacity utilisation and persistently high inflation", said Lucas Papademos, ECB vice-president, yesterday.

The ECB's fear is that high inflation rates caused by a rising oil price will become entrenched by feeding through into wage settlements.

The dollar fell the most against the euro in more than a week yesterday as New York state manufacturing shrank in June and the Group of Eight's weekend summit stopped short of calling for a strong US currency.

An index tracking the dollar against the currencies of six US trading partners dropped from the highest level since February.

"There's further room for disappointment for dollar bulls," said Mike Moran, senior currency strategist at Standard Chartered Bank in New York.

- (Financial Times service/Bloomberg)