WHEN Shell announced this month that it would lower its petrol prices in Argentina by 3.3%, the country's president, Néstor Kirchner, promptly declared "a clear victory for the Argentine people". It was certainly a political victory for the president. He had called for a boycott of the Anglo-Dutch oil company after it raised prices in March. But it was cold comfort for Argentines, who are suffering the return of a bugbear they thought they had shaken off.
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Consumer prices leapt by more than 4% in the first quarter of 2005--an annualised rate of over 17% (see chart). Apart from a spike after the peso's traumatic devaluation in 2002, that would be the highest annual rate since 1992. Many local economists place the blame squarely at Mr Kirchner's door.
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In a successful effort to resuscitate the economy after the collapse of 2002, the central bank pumped in money. It printed pesos to buy dollars, thus also boosting exports and import-competing local businesses by keeping the exchange rate undervalued. Conveniently, this allowed the government to impose export taxes to boost its revenues. These policies, together with non-payment of debt, engineered an impressive recovery: output is now almost back to its pre-collapse peak of 1998.
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But the authorities carried on boosting demand for too long. In the three months to December, the monetary base rose from 47.5 billion pesos ($16 billion) to 52.5 billion pesos. The government joined in too: "discretionary" federal spending rose by 19% last year, while the government decreed wage increases for the private sector. But the "output gap"--resources left idle by the collapse--is closing. Investment is growing, but from next to nothing. The inevitable result of more money chasing not many more goods has been price rises.
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Argentines have painful memories of inflation. As real wages dip, some labour unions have already demanded further rises. Inflation is the one issue that could compromise the otherwise rosy chances of Mr Kirchner's allies in a congressional election in October.
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The central bank has begun to tighten the reins. It is buying back pesos, buying fewer dollars, and has raised interest rates. Many economists reckon these measures will curb inflation to 11% or so this year--but at the cost of slowing growth. The answer might be to allow the peso to appreciate faster. That would increase pressure on the government to cut export taxes. But with possible energy shortages in the southern-hemisphere winter likely to put further strain on prices, the government may have little choice.
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SOURCE: EIU/ INFO-e