June 8 (Bloomberg) -- Argentina’s inflation rate is picking up, even as growth in South America’s second-biggest economy comes to a standstill, putting pressure on policy makers to weaken the currency.

The monthly inflation rate rose to 1.5 percent in May from 1.2 percent in April, said Jose Luis Blanco, an economist at Buenos Aires-based Tendencias Economicas research. Some private economists, including Blanco, estimate inflation without regard to official government data, which they consider unreliable.

“The central bank will put up less resistance against a depreciation of the peso,” Alberto Ramos, an economist at Goldman Sachs Group Inc. in New York, said in a telephone interview. “The government needs a competitive exchange rate because it needs to boost fiscal income, to improve external accounts and because high inflation raises production costs.”

Consumer prices are rising because the government has failed to damp inflationary expectations, Ramos said. A weaker peso would boost the government’s tax revenue in pesos by increasing export duties, he said.

Ramos expects the currency may weaken to about 4 pesos per dollar in the second half of 2009 from 3.7547 a dollar June 5.

The government will report official inflation data for May on June 10.

No Devaluation Plans

A central bank spokesman, who asked not to be identified in accordance with government policy, said June 4 that the bank has no plans for a sudden devaluation of the peso and will continue its strategy of an “administered float.” The bank buys and sells pesos regularly to avoid steep swings in the currency.

The spokesman said the peso has weakened significantly during the past year without creating problems.

The currency is down 18 percent in the past 12 months, the second-worst performer in Latin America after Mexico’s peso.

Flavia Cattan-Naslausky, an analyst with RBS Securities Inc., wrote in a report last week that the peso will probably weaken gradually following midterm elections on June 28.

Higher wages and fees for electricity, gas and other utilities have increased manufacturing costs and made Argentine exports less competitive abroad, said Alberto Borga, president of BPGroup SA, a Buenos Aires-based auto-parts maker.

“We are losing competitiveness for our exports because Argentina is an expensive country,” Borga said in a telephone interview. “Besides the effect of the global crisis that has hurt our exports, we are losing also because our costs are too high.”

Enrique Mantilla, president of the Argentine Chamber of Exporters, said exports will fall 21 percent this year to $55 billion.

Economic Contraction

Industrial production declined 1.2 percent in April from a year earlier. Automobile factories cut output by 24 percent in May from last year. The economy will shrink 3 percent this year, according to the median estimate of five economists surveyed by Bloomberg. That would be the first contraction since 2002.

Under normal conditions, a slowdown in gross domestic product would help damp inflation, said Roberto Rigobon, an economics professor at the Sloan School of Management at the Massachusetts Institute of Technology. That isn’t happening in Argentina, which may portend a slow economic recovery, he said.

“It will take longer to recover from a crisis like this one, where there is disinvestment and an excess of government intervention,” said Rigobon, who tracks about 150 prices of goods in Argentina, including cooking oil, rice and sugar, for Inflacion Verdadera, a Web site aimed at measuring inflation.

Markets Last Week

Last week, the yield on Argentina’s benchmark 8.28 percent dollar bonds due in 2033 declined 131 basis points, or 1.31 percentage points, to 17.637 percent, according to Bloomberg data. The bond’s price rose 3.75 cents to 45 cents on the dollar.

The Buenos Aires benchmark Merval stock index rose 3.2 percent to 1,638.1 points. Lender Banco Macro SA (BMA AF) rose 17.3 percent, while Petroleo Brasileiro SA (APBR AF), the local listing of Brazil’s state-run oil company, fell 3.8 percent.

The following is a list of events in Argentina this week:

Event                                   Date
Consumer Price Index                    June 10
Buenos Aires Cereal Exchange Forecast   June 10
Early Boden 2012 Bond Payment           To be announced

To contact the reporter on this story: Eliana Raszewski in Buenos Aires at eraszewski@bloomberg.net

Last Updated: June 8, 2009 00:01 EDT