Inflation rose to a new 10-year high of 8.9% in June, led by higher oil and food prices.

Pairoa Sudsawarng, the deputy permanent secretary of the Commerce Ministry, said the 44.7% increase in fuel prices from last year was the main factor pushing up product prices.

''Oil is the main reason driving inflation,'' said Mrs Pairoa. ''It affects both the manufacturing sector as well as the prices of consumer and food products.''

Global oil prices hovered above $140 per barrel yesterday, driven by tensions in the Middle East and a weak dollar.

Thailand's consumer price index in June showed the highest year-on-year increase since July 1998, when it hit 10%. The CPI is based on the prices of 373 products and services, including food and beverages, apparel, housing, medical and personal care, vehicles, transport and communication, recreation and education.

According to the Commerce Ministry, food and beverage prices increased 11.4% in June from last year, while non-food items rose 7.2%. Transport and communication costs rose 16.1% in June from last year due to higher energy costs.

Compared with the previous month, prices in June rose by 1.2%, a decline from the 2.1% month-on-month gain posted in May.

For the first half of the year, inflation averaged 6.3%, compared with 2.2% for the same period last year.

Core inflation, which excludes energy and food prices, rose 3.6% in June from 2007, up from 2.8% year-on-year in May.

The rise in inflation is almost certain to press the Bank of Thailand to raise interest rates when it meets on July 16. The central bank's Monetary Policy Committee sets interest rates with an explicit target to keep core inflation within a range of zero to 3.5% over the next eight quarters.

Somphob Manarungsan, an economist at Chulalongkorn University, said interest rates would almost certainly rise despite the fact that consumption and investment were slowing.

Keeping interest rates unchanged would only put further pressure on inflation to increase, he said. The central bank has maintained its one-day repurchase rate unchanged at 3.25% since mid-2007, a policy rate among the lowest in the region.

Kobsidthi Silpachai, head of economic research at Kasikornbank, said the central bank could face growing questions about whether current interest rates have been maintained too long in light of rising inflation.

''Actually, I disagree with calls to raise interest rates, as this would only add further costs to businesses in addition to the burden of higher energy prices. Ultimately, that burden will fall on consumers,'' he said.

Mr Kobsidthi said inflationary pressure was being driven by rising oil prices from greater global demand, particularly from emerging markets such as China.

Rather than raise interest rates, the central bank should look to make the baht stronger against the dollar to reduce the cost of imports, he said.

''We could let the baht appreciate against the dollar. On the other hand, a strong baht would potentially undermine exports,'' Mr Kobsidthi said, adding that an exchange rate of 31 to 32 baht to the dollar was the most appropriate step to keep core inflation within the target range of under 3.5%.

The baht currently trades at 33.4 to the US dollar, and has remained relatively stable this year thanks to intervention by the central bank.

Rising inflation and the slowing economy have taken a toll on business and consumer confidence.

The Nielsen Co, a market research company, announced yesterday that consumer confidence among Thais had fallen to its lowest level since 2005 due to weak economic growth and political uncertainties. Out of 500 online respondents, 81% believed the Thai economy was now in a recession. A majority agreed they would increase their savings rather than spend over the next 12 months.

Worldwide, consumer confidence dropped in 39 out of 48 countries over the past six months, with New Zealand, the United States and Latvia suffering the deepest declines. Fifteen of those 39 saw their confidence indices drop by double digits.

''Consumers around the world are struggling with the same global issues: soaring global oil prices, rising commodity prices, rising interest rates and increasing inflation,''said Chantira Luesakul, the managing director of The Nielsen Company (Thailand) Ltd.