Already under pressure due to the ballooning costs of their subsidy policies, many Latin American countries are also threatened by their old nemesis, inflation. Moreover, dealing with one could actually worsen the other.

Countries in Latin America that subsidize energy and food have seen their budgets climb in alarming fashion this year due to soaring international prices for these commodities.

As reported in the last issue of Subsidy Watch, Argentina saw its subsidy spending jump 130% in the first trimester of this year, with most of the money going to energy and food price-control schemes.

Adding to Argentina's financial woes, a survey conducted by Torcuato Di Tella University last month found that inflation was expected to reach 35% over the next twelve months.

These numbers put Argentina in a difficult position: ifit lowers food and energy subsidies to reign in the budget, it will simultaneously cause prices for these goods to rise, therefore increasing inflation.

For a region that prided itself for finally reigning in rampant double digit inflation during the 70s and 80s, these new inflationary pressures are troubling, so much so that some countries in the region have increased subsidies in the hope of lowering inflation.

In June, Chile injected US$ 1 billion into its Petroleum Price Stabilization Fund, increasing its subsidization of hydrocarbons by 50%. In an interview with the Santiago-based Radio Coperativa, Chile's Central Bank president José De Gregorio predicted that the decision would reduce inflation in the Andean nation this year by half a percentage point.

Inflation in Chile is expected to rise to 5.5% this year, well above the Bank's two-year target rate of 3%.

In Venezuela the situation is worse. Though the country is a major petroleum exporter, its gasoline subsidies were estimated to cost it US$ 12 billion in 2007, due mainly to its policy of maintaining gasoline prices at around US$ .03 a liter, well below production costs. As international prices rise, so does the cost of maintaining these low prices.

Yet even with low fuel prices, inflation in Venezuela is expected reach almost 19.5% in 2008, a problem that has forced Chavez to take action.

In a televised speech on 11 June, Chavez announced US$ 1 billion for a series of programs to fight rising inflation. Among these programs, Chavez said US$ 35 million would be set aside for new subsidies to cereals and coffee. Another US$ 115 million would be spent on loan forgiveness program for small and medium-sized rice, corn and coffee farmers.

However, one country not planning a large increase in subsidy spending is Brazil, which has opted for a different approach to combating inflation. Speaking on 19 May during his weekly "Breakfast with the President" radio show, President Lula confirmed that his country would not set price controls or export restrictions like others in the region.

Instead, Lula announced that Brazil would seek to lower inflation by curbing government spending and raising interest rates -- even if it resulted in a slowing of the Brazilian economy.