By Millie Munshi

March 7 (Bloomberg) -- Rising commodity costs and a slowing economy may be sending the U.S. into a period of so-called stagflation like the 1970s, said Brian Hicks, who helps manage $1.5 billion at U.S. Global Investors Inc. in San Antonio.

Gold, corn and crude oil reached records this 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 dollar fell to a record low against the euro today on speculation the 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 today in an interview. ``That could potentially lead to stagflation as commodity prices continue to gain.''

Fed Chairman Ben S. Bernanke last week dismissed suggestions that the U.S. economy is close to the conditions of stagnant growth and high inflation that create stagflation.

The U.S. 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.''

Fastest in 17 Years

Consumer prices in the U.S. climbed 4.1 percent last year, the fastest since 1990. The dollar weakened to $1.5459 against the euro today, 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 previous all-time inflation-adjusted record of $92.50 a barrel reached in 1981. The price reached $106.54 today 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 in 2008, touching a record $995.20 an ounce on March 5. The metal soared sixfold from 1977 to 1980 as the U.S. entered a recession and the inflation rate climbed to 14 percent. Adjusted for inflation, the 1988 gold record would be $2,284 today, according to the Federal Reserve.

``The place to be right now is in precious metals,'' Hicks said. ``It's not a question of if gold will reach $1,000, but when.''

Minding Commodities

The Federal Reserve needs to be ``mindful' that soaring commodity prices may raise inflation more than expected, Fed Vice Chairman Donald Kohn said today.

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 U.S. growth is an ``anomaly,'' he said.