Commodities "permanently higher"--PIMCO's El-Erian

CHICAGO, June 25 (Reuters) - Rising demand from emerging economies such as China and India coupled with their inefficient use will keep prices of oil, gold and other commodities "permanently higher," the co-chief of the world's largest bond fund company said on Wednesday.

"We are now living in a world of permanently higher commodity prices, if you compare ourselves to three, four, five years ago. This is not a world of reversion to the mean," Mohamed El-Erian, co-chief executive and co-chief investment officer of Pacific Investment Management Co (PIMCO), said.

El-Erian's comments at Morningstar's annual investment conference came after the U.S. Federal Reserve left interest rates unchanged but said upside risks to inflation had grown because of rising energy and commodity prices.

El-Erian said the Fed's job was a difficult one as it had to balance objectives of growth and fighting inflation but added if it were forced to choose one then the U.S. central bank would pick the growth objective.

"If these objectives become completely contradictory, at the margin they are more likely to give up the inflation objective than they are to give up the growth objective," he said.

The PIMCO executive told reporters he saw the U.S. economy growing at a slower 1 to 2 percent over the next two years, compared with the V-shaped recovery the Fed was projecting.

"We think it's going to take a longer time for the U.S. to recover because you've got to work out the excesses in the housing sector and excesses in consumer sectors," El-Erian said.

PIMCO, which had $812 billion in assets as of end-March, was eyeing launching products that would be benchmarked against "forward-looking" indices, El-Erian said. PIMCO is a unit of German insurer Allianz (ALVG.DE).

El-Erian also said the firm was trying to find a solution regarding the auction-rate preferred shares issued by its closed-end funds, whose investors are unable to sell them as the credit crisis froze the market for those securities. But he declined to say by when a solution would be found. (Reporting by Muralikumar Anantharaman; Editing by Gary Hill)