June 26 (Bloomberg) -- Commodities surged to a record on demand for raw materials to counter a loss in purchasing power amid escalating concerns that grain and energy supplies will dwindle.

Oil reached an all-time high of $140.39 a barrel as Libya threatened to cut output and OPEC's president said the price may reach $400 should an Iranian conflict ensue. Corn climbed to a record $7.95 a bushel after floods ravaged Midwest crops.

Gold soared the most in two years after the Federal Reserve yesterday kept the benchmark U.S. interest rate at 2 percent, even as policy makers acknowledged heightening inflationary expectations.

``There's increasing uncertainty about inflation and the geopolitical situation,'' said Ron Goodis, futures trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``All of this just makes people want to own actual, tangible stuff that they can store, sell or barter. People want to own commodities because it's real stuff.''

The UBS Bloomberg Constant Maturity Commodity Index rose 2.5 percent to 1,681.57 at 3:57 p.m. New York time after earlier reaching a record 1,683.383. The index gained 50 percent in the past year as corn and crude oil more than doubled. Soybeans, wheat, cocoa and natural gas have climbed more than 50 percent in 12 months.

The Fed has cut U.S. interest rates seven times to 2 percent from 5.25 percent in mid-September as a credit crisis and a housing slump threatened to push the economy into a recession. Lower borrowing costs generally weaken the dollar, spur inflation and boost demand from traders who hold commodities as a store of value, some analysts says.

Dollar Drops

The U.S. Dollar Index, a measure against the euro, yen and four other major currencies, fell 0.6 percent and is down 1.3 percent in three days.

In its statement yesterday, the Federal Open Market Committee said that ``upside risks'' to prices have picked up. The statement also said consumer spending is ``firming,'' while acknowledging that rising energy prices will curb growth into 2009. The Fed cited ``the elevated state'' of some measures of inflation expectations and dropped an April forecast of a ``leveling out'' in commodity prices.

``The statement was so undefinitive and nuanced it created a level of uncertainty that hurt the dollar and benefited commodities,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``There's a total air of uncertainty regarding the financial markets, the inflation situation and the geopolitical situation. Gold and commodities thrive in that atmosphere.''

Iran Tensions

Chakib Khelil, Algeria's oil minister and the president of the Organization of Petroleum Exporting Countries, said in an interview on France 24 television that a conflict involving Iran might push oil prices over $200 and as high as $400.

Oil rose as much as 4.3 percent today. Iran has the second- biggest proved oil reserves and is OPEC's second-largest producer.

The Fed has been more aggressive in cutting interest rates and slower to raise borrowing costs than other central banks, a position that continues to damp the value of the U.S. currency, analysts said.

``The Fed's decision to not fight inflation is having a direct impact on gold prices along with many other commodities,'' said Tom Hartmann, an analyst at Altavista Worldwide Trading Inc. in Mission Viejo, California. ``Interest rates will not rise, though that would be a quick way to combat high commodity prices. The Europeans and other central banks seem keenly aware that inflation is a major problem.''

The European Central Bank has held rates unchanged at 4 percent since June 2007. The Bank of England's rate is at 5 percent. The euro traded as high as $1.5751 against the dollar today. The currency reached a record $1.6019 on April 22.

U.S. GDP

Analysts say the U.S. economy is too feeble for the Fed to raise rates any time soon. The U.S. gross domestic product expanded at an annual rate of 1 percent in the first quarter, capping the weakest six months of growth in five years.

``There's a real big problem with food and oil, but the Fed won't do anything about it,'' said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois. ``Inflation is going to scream. The dollar is going to get slammed again.''

In May, U.S. consumer costs climbed at an annual rate of 4.2 percent and wholesale prices rose 7.2 percent, according to data from the Labor Department.

`Unstoppable'

``The Fed seems to have decided to protect growth by holding rates low and to accept the fact that this period of inflation is inevitable and unstoppable,'' said Patrick Chidley, an analyst at Barnard Jacobs Mellet in Stamford, Connecticut. ``Inflation is the lesser of two evils. Investors will increase their positions in gold, and it's likely to continue upward.''

Demand for raw materials will climb as inflation quickens, analysts said. Commodity assets under management expanded by a record in the first quarter to $225 billion, according to Barclays Capital.

``The tepid monetary response to rising inflationary pressures suggests that there is little reason to anticipate a severe demand slowdown over the next few months,'' analysts at Barclays said in a report today. ``We do not believe commodities are yet in a speculative bubble and continue to advise exposure.''

Gold futures for August delivery jumped $32.80, or 3.7 percent, to $915.10 an ounce on the Comex division of the New York Mercantile Exchange. The percentage gain was the most for a most-active contract since June 2006.

Gold reached an all-time high of $1,033.90 in March as commodities soared and the dollar fell to a record against the euro.

To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net; Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

Last Updated: June 26, 2008 16:03 EDT