Rising commodity costs and a slowing economy may be sending the US into a period of so-called "stagflation" like the 1970s, said Brian Hicks, who helps manage US$1.5 billion at US Global Investors Inc in San Antonio.
Gold, corn and crude oil hit records last week on speculation demand will expand in China, the world's fastest-growing major economy, and traders bought commodities as a hedge against inflation. The US dollar fell to a record low against the euro on Friday on speculation the US Federal Reserve will cut borrowing costs for a sixth time since September to avoid a recession.
"If the Fed continues to cut rates, they'll be driving down the value of the dollar," Hicks said in an interview on Friday. "That could potentially lead to stagflation as commodity prices continue to gain."
Fed Chairman Ben Bernanke last month dismissed suggestions that the US economy is close to the conditions of stagnant growth and high inflation that create stagflation.
The US central bank has cut borrowing costs five times to 3 percent since September, the fastest pace since 1990. Trading in interest-rate futures now show a 98 percent chance the Fed will cut rates to 2.25 percent in its next policy announcement on March 18.
"Housing and credit markets still look bad, which means the Fed needs to be more aggressive cutting rates," Hicks said. "That's only going to mean a lower dollar and even higher commodity prices. We could see inflation accelerating further."
Consumer prices in the US climbed 4.1 percent last year, the fastest since 1990. The US dollar weakened to US$1.5459 against the euro on Friday, the lowest ever.
The pickup in the rate of inflation was spurred in part by a jump in the cost of energy. On Oct. 15, oil passed the all-time inflation-adjusted record of US$92.50 a barrel reached in 1981. The price reached US$106.54 on Friday on the New York Mercantile Exchange, the highest ever.
"We're going to have strong money flows into commodities as a hedge against further inflation," Hicks said.
Gold has climbed 16 percent this year, touching a record US$995.20 an ounce on Wednesday. The metal soared sixfold from 1977 to 1980 as the US entered a recession and the inflation rate climbed to 14 percent. Adjusted for inflation, the 1988 gold record would be US$2,284 today, the Federal Reserve said.
"The place to be right now is in precious metals," Hicks said. "It's not a question of if gold will reach US$1,000, but when."
The Federal Reserve needs to be "mindful" that soaring commodity prices may raise inflation more than expected, Vice Chairman Donald Kohn said on Friday.
Inflation hasn't reached a high enough level to signal stagflation, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
Still, the combination of escalating commodity prices, being driven by growth in China and emerging markets, coupled with slower US growth is an "anomaly," he said.
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