Euro zone inflation jumped to a record high of 4.0 percent in June, data showed on Monday, cementing expectations the European Central Bank will raise interest rates this week despite slowing economic growth.
"It's a bit of a shocker," said Gilles Moec, an economist at Bank of America who like many others had predicted a marginally lower figure of 3.9 percent for the annual inflation rate.
Euro zone interest rate futures extended falls and short-dated bond yields rose after the data.
"It's clearly going to rattle the ECB further....It certainly plays into the hands of the hawks on the ECB Governing Council," Moec said.
The 4.0 percent year-on-year figure for price growth in the 15-nation euro in June represented a leap from May's 3.7 percent, moving further from the ECB's target of just below 2 percent, European Union statistics office Eurostat said.
It was the highest inflation figure for the currency area since measurements started in 1997 and the European Commission seized on the occasion to repeat warnings against demands for big pay rises, saying that would only make matters worse.
"What is important again ...is to ensure that those inflationary expectations don't become entrenched and to avoid at all costs a wage-price spiral, which would have very damaging consequences for our economy and citizens in general," European Commission spokeswoman Amelia Torres said.
Analysts polled by Reuters had expected June inflation to rise to 3.9 percent, boosted by growing energy and food prices.
ECB officials have given clear signs that the bank will increase its main interest rate by 0.25 percentage point to 4.25 percent at its Governing Board's meeting on Thursday.
Nick Kounis, a senior economist at Fortis, said the central bank would probably have to raise rates more than once.
"We expect the widely expected July hike to be followed by further moves in Q4 of this year and in Q1 of next year, which would take the minimum bid rate up to 4.75 percent," he said.
Other economists said they still expected only one hike.
"They (the ECB) probably will keep the language and bias towards a rate hike but we don't think they will implement another one," Juergen Michels, European economist at Citi.
The ECB wants to limit the impact of growing energy and food costs on prices in the wider economy, trying to prevent what it calls a wage-price spiral.
Central bankers attending talks at the annual meeting of the Bank for International Settlements on Sunday issued a stern warning against the dangers of surging inflation, although there was no one-size-fits-all solution.
Oil prices set a new record on Monday at more than $143 per barrel.
But ministers from Germany, Spain and France warned the ECB at the weekend against measures that could stifle the economy.
"The ECB has to consider that they could possibly send the wrong signal with an interest rate increase because it could have a pro-cyclical impact at a point when the economy is slowing down," German Finance Minister Peer Steinbrueck told the weekly Der Spiegel.
On Monday, France's junior minister for European affairs, Jean-Pierre Jouyet, said the ECB was pursuing the right strategy if its tactics persuaded the U.S. Federal Reserve to take a more "responsible" stance, an allusion to the slump in the U.S. dollar accentuated by low interest rates in the United States.
While the ECB has been considering a rate rise, the Fed has been lowering borrowing costs to support slowing growth.
The euro has also been supported by stronger economic fundamentals although the outlook has begun to worsen.
European Commission data showed on Friday that euro zone economic sentiment dropped strongly in June, led by weaker confidence in all sectors except services while inflation expectations among consumers and companies jumped.
Eurostat's inflation estimate contained no monthly data or details but separate country data has shown inflation surging in Germany, the euro zone's biggest economy, to a near 15-year high of 3.3 percent in June, compared with May's 3.0 percent.
In Spain, a one-time boomer hit by a housing bust, inflation in June was announced at 5.1 percent, the highest since records began in January 1997, while Belgian inflation was at a near 24-year high of 5.8 percent.
Euro zone newcomer Slovenia said on Monday its inflation rate increased to 6.8 percent in June from May's 6.3 percent.
In Italy, EU harmonised consumer prices (HICP) rose a preliminary 0.5 percent month-on-month in June, with the year-on-year inflation rate accelerating to a new record of 4.0 percent from 3.7 percent, data showed on Monday.