G-8 Says Oil, Food Prices Pose Risk to World Economy

By Toko Sekiguchi and Theophilos Argitis

July 8 (Bloomberg) -- Group of Eight leaders said rising oil and food costs pose a ``serious challenge'' to the global economy, indicating inflation has become their primary concern.

``We have strong concerns about the sharp rise in oil prices,'' the group said in a statement issued today in Toyako, Japan, where the leaders are holding their annual summit. ``The world economy is now facing uncertainty and downside risks persist.''

Leaders from the U.S., Japan, Germany, Italy, Britain, France, Canada and Russia proposed holding a forum to encourage dialogue between energy producers and consumers, focusing on energy efficiency. ``Production and refining capacities should be increased in the short-term,'' they said.

``They have clearly signaled that public enemy number one is inflation,'' said John Kirton, director of the G-8 Research Group at the University of Toronto. The comments suggest spiraling prices are replacing credit-market losses as their biggest economic priority, he said.

Crude oil doubled since last year's G-8 summit in Germany, increasing the threat to global growth. Record corn, wheat and rice prices have also contributed to accelerating inflation, prompting the Bank of International Settlements to recommend the world's central banks raise interest rates.

Central banks in the U.S., Canada, U.K. and Japan haven't tightened monetary policy since financial markets seized up last August. The European Central Bank increased its benchmark rate by a quarter point to 4.25 percent last week.

`Remain Positive'

The G-8 leaders said they ``remain positive'' about the long-term outlook for their economies and pledged to take ``appropriate actions'' to ensure stability.

``We express our strong concern about elevated commodity prices, especially of oil and food, since they pose a serious challenge to stable growth worldwide, have serious implications for the most vulnerable, and increase global inflationary pressure,'' the statement said.

The leaders called on energy-producing nations to increase short-term capacity and invest more in production to bolster supply in the ``medium-term''. They also called on oil-consuming countries to increase energy efficiency.

``The summit recognizes quite clearly how serious to the global economy'' are high oil prices, International Energy Association Executive Director Nobuo Tanaka said in an interview before the statement was released.

The leaders also said some emerging market countries with growing current account surpluses needed to allow their currencies to adjust. No specific reference to the U.S. dollar or other currencies was made in the statement.

Corn surged 26 percent last month and soybeans jumped 15 percent as the worst Midwest floods since 1993 ravaged parts of the U.S. Oil climbed to a record $145.85 a barrel on July 3 amid heightened speculation that a conflict between Israel and Iran would disrupt Middle East petroleum shipments.

To contact the reporters on this story: Toko Sekiguchi in Toyako, Japan, at tsekiguchi3@bloomberg.net