Greenspan sees early signs of U.S. stagflation

WASHINGTON (Reuters) - The U.S. economy is showing early signs of stagflation as growth threatens to stall while food and energy prices soar, former U.S. Federal Reserve Chairman Alan Greenspan said on Sunday.

In an interview on ABC's "This Week with George Stephanopoulos," Greenspan said low inflation was a major contributor to economic growth and prices must be held in check.

"We are beginning to get not stagflation, but the early symptoms of it," Greenspan said.

"Fundamentally, inflation must be suppressed," he added. "It's critically important that the Federal Reserve is allowed politically to do what it has to do to suppress the inflation rates that I see emerging, not immediately, but clearly over the intermediate and longer-term period."

The U.S. central bank has lowered its benchmark interest rate three times since mid-September as a housing downturn, tightening credit conditions, and steep food and energy prices threaten to push the U.S. economy into recession.

But cutting rates can have the unwanted side effect of pushing up prices, so the Fed finds itself in a tricky position of trying to revive growth without spurring inflation.

Last week, U.S. data showed that wholesale inflation rose at the highest rate in 34 years, while consumer prices rose the most in more than two years.

Greenspan repeated his assessment that the probability of a U.S. recession had moved up toward 50 percent but noted that corporate America's debt levels were in good shape, which should help cushion the blow from tightening credit terms.

"The real story is, with the extraordinary credit problems we're confronting, why the probabilities (of recession) are not 60 percent or 70 percent," he said.