Argentina Seems to Have a Handle on Inflation : Economy: Although prices rose 3% in January, the government’s program appears to be working.

A surge in inflation in January has tarnished the sparkle of Argentina’s economic stability program. But consumer prices should remain under control, economists say.

Last year, the monthly inflation rate plunged from 27% in February to 0.4% in November and 0.6% in December--a spectacular accomplishment for President Carlos Saul Menem and Economy Minister Domingo Cavallo.

“We have the inflation of a civilized country,” Menem boasted in December. But in January, increases in prices for foods and services pushed the cost of living up by 3%, the highest monthly rate since June.

Compounded, 3% a month would equal an annualized rate of 42.6%. While most early forecasts for February inflation are less than 2%, the government goal of no more than 7% inflation during 1992 now seems all but impossible to meet.

Roberto Alemann, a former economy minister, said prices rose partly in response to increased consumer buying. “Merchants realize that demand is firm,” he said. “When purchasing power is good, people raise prices.”

Alemann expressed concern that January price increases could fuel labor demands for pay raises indexed to the cost of living--a longtime practice that the current government rejects as inflationary.

“It is worrisome because the culture of indexation has not disappeared in Argentina,” he said. But Alemann said the surge in prices does not appear to set a trend because the government’s tight monetary controls and other policies are acting as a damper on inflation.

Jorge Avila, an analyst with the consulting firm Macroeconomica, predicted that the surge in inflation will end by March.

“I am worried about the consequences, but I have no doubt that it is temporary,” Avila said. “It produces something that is serious, that the dollar buys increasingly less in Argentina.”

Part of the government stability program is a law setting an exchange rate for the new Argentine peso of no more than one to the U.S. dollar. With inflation, exporters’ costs go up, but the peso value of their returns does not.

As a result, many exporters say a devaluation is needed. Government officials argue that a devaluation would risk a new inflationary spiral because merchants are accustomed to pegging prices to the dollar exchange rate.

“As long as I am minister, they are not going to get a devaluation to compensate for salary increases and inflation,” Cavallo said last week. Speaking to a gathering of about 500 businessmen and bankers, he also warned that giving in to labor demands for cost-of-living salary increases could endanger economic stability.

“Much of what we have achieved so far is held up by pins and could easily be lost if we stray from our path,” he said.

Cavallo’s policy, established when he became economy minister in February, 1991, soon made Argentina a Latin American showcase. Not only did the “Cavallo Plan” bring rampant inflation under control in a remarkably short time, it also reactivated a stagnated economy.

Argentina’s gross domestic product grew by an estimated 5% in 1991.

With a population of 35 million in a territory nearly eight times the size of Germany, this country is regarded as an eventual contender for First World status if it maintains monetary stability.

“Without stability you can’t grow,” Cavallo told the businessmen.

Part of the country’s anti-inflation success is credited to the government’s reductions of spending and increases in revenue since Menem took office in 1989.

“When I assumed the government, there was a fiscal deficit of $6.1 billion,” Menem said on a trip to Europe last week. “Last December we had a surplus of $200 million.”

Earlier, he said the January surge of inflation “does not worry me or the Argentine people. The only ones who are worried are the journalists and politicians.”

While that may have been an exaggeration, some worries expressed by the press were muted.

“Although the increase awakened a logical uneasiness, it is believed that underlying reasons do not exist for an inflationary resurgence,” said an editorial in the national newspaper Clarin.

Argentine Inflation Resurfaces The rise in inflation in January could threaten recent economic gains in Argentina, which experiencd an 84% inflation rate in 1990. 1991 Feb: 27.0% 1992 Jan: 3.0% Source: Ministry of Economy, Institute of Statistics